Equity strategist predicts S&P 500 won’t resume climb until spring 2024

Equity strategist predicts S&P 500 won’t resume climb until spring 2024

In a recent note, equity strategist Barry Bannister of Stifel warned that the S&P 500 may not see any significant upward movement until spring 2024. Bannister, who accurately predicted the stock rally in the first half of the year, believes that higher interest rates could put pressure on corporate earnings and weigh on stock prices. He extended his target for the S&P 500 to April 2024, indicating a sideways trading range for the next few years. Bannister’s cautious outlook diverges from more bullish projections on Wall Street, suggesting that investors should brace for a period of stagnation in the stock market.

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Equity strategist predicts S&P 500 won’t resume climb until spring 2024

Background

Barry Bannister, an equity strategist at Stifel, accurately predicted the U.S. stock-market rally in the first half of 2023. Now, he believes that the S&P 500 will remain flat or rangebound until at least April 2024. Bannister has extended his target for the S&P 500 to 4,400 by April 2024, citing the potential pressure on corporate earnings due to higher interest rates. He anticipates that the rally off the October 2022 lows is over, and a sideways trading range has been in effect since summer 2023. Bannister’s previous accurate predictions and his view on economic risk for equities in late 2023 give weight to his forecast.

Higher interest rates could pressure corporate earnings

Bannister points out that higher interest rates could have a negative impact on corporate earnings, which, in turn, would affect stock prices. He believes that the Federal Reserve’s return to “policy modulation at normalized rates” indicates that the key 10-year U.S. Treasury yield will peak around 5% in the current cycle. However, Bannister projects a “normalized” 10-year yield of 5% or 6% in the mid-2020s, which could further pressure corporate earnings.

Rally off the Oct. 2022 lows is over

According to Bannister, the rally that occurred after the October 2022 lows has come to an end. He believes that since the summer of 2023, the stock market has entered a sideways trading range. This is in line with his projection that the S&P 500 won’t resume its climb until spring 2024. The absence of a new record-high for the S&P 500 by year-end 2023, as projected by some of the most bullish strategists on Wall Street, further supports Bannister’s view.

Increased economic risk for equities in late 2023

Bannister’s forecast includes an increase in economic risk for equities in late 2023. As stock gains stall in the second half of the year, he expects the risk to rise. This aligns with his view that the S&P 500 will remain flat or rangebound for the rest of the 2020s decade. Bannister predicts that price-to-earnings ratios across U.S. firms will be halved due to tightening financial conditions, offsetting the growth in earnings-per-share (EPS).

Key 10-year U.S. Treasury yield expected to peak around 5%

Bannister anticipates that the key 10-year U.S. Treasury yield will peak around 5% in the current cycle. This projection is based on the Federal Reserve’s return to “policy modulation at normalized rates.” However, he also projects a “normalized” 10-year yield of 5% or 6% in the mid-2020s. This projected increase in yields could put further pressure on corporate earnings and potentially impact stock prices.

Projected ‘normalized’ 10-year yield of 5% or 6% in the mid-2020s

Alongside the anticipated peak of the key 10-year U.S. Treasury yield, Bannister projects a “normalized” 10-year yield of 5% or 6% in the mid-2020s. This projection aligns with his view that corporate earnings will face pressure due to higher interest rates. A “normalized” yield at this level could further impact stock prices and contribute to the sideways trading range and flat market that Bannister foresees.

Pressure on corporate earnings due to higher Treasury yield

The projection for higher interest rates and a “normalized” 10-year U.S. Treasury yield could potentially put pressure on corporate earnings. As yields increase, borrowing costs may rise for companies, impacting their profitability. Higher borrowing costs can lead to lower earnings, which, in turn, can affect stock prices. Bannister’s view takes into account this potential pressure on corporate earnings when predicting a flat or rangebound market for the S&P 500.

U.S. labor market health as a source of economic resilience

Bannister identifies the health of the U.S. labor market as a source of economic resilience. He believes that the Federal Reserve’s rate normalization is based on the labor market’s performance. However, as the Fed tightens financial conditions, it may put pressure on price-to-earnings ratios for stocks. Bannister emphasizes the influence of the labor market on financial conditions, which ultimately can impact the performance of the stock market.

Fed rate normalization could tighten financial conditions and weigh on price-to-earnings ratios

The Federal Reserve’s rate normalization is expected to tighten financial conditions. Bannister asserts that this tightening could have an impact on price-to-earnings ratios for stocks. As interest rates increase, the cost of capital rises for companies, potentially affecting their valuation. The tightening of financial conditions due to rate normalization may lead to lower price-to-earnings ratios, which can contribute to a flat or rangebound market for the S&P 500.

S&P 500 expected to remain flat or range-bound in the 2020s decade

Based on his analysis and projections, Bannister expects the S&P 500 to remain flat or range-bound throughout the 2020s decade. This view is influenced by factors such as higher interest rates, pressure on corporate earnings, and tightening financial conditions. Bannister predicts that price-to-earnings ratios across U.S. firms will be halved, offsetting potential growth in earnings-per-share. These factors contribute to his projection of a market that lacks significant upward momentum.

Price-to-earnings ratios across U.S. firms will be halved

Bannister anticipates that price-to-earnings ratios across U.S. firms will be halved. This decrease in valuations is a result of tightening financial conditions and potential pressure on corporate earnings. As interest rates rise and borrowing costs increase, the profitability of companies may be negatively impacted. Lower earnings can lead to lower valuations and lower price-to-earnings ratios, contributing to a flat or range-bound market that Bannister forecasts.

Offset growth in earnings-per-share (EPS)

While price-to-earnings ratios are expected to be halved, Bannister projects that growth in earnings-per-share (EPS) may offset this reduction. Despite potential pressure on corporate earnings, Bannister forecasts that the S&P 500 EPS will at least double from $156 in 2019 to a range of $300-325 in 2030. This projection indicates potential growth in EPS, although price-to-earnings ratios may lag behind due to tightening financial conditions and other factors.

Bannister’s forecast for S&P 500 EPS in 2030

Looking ahead, Bannister forecasts that the S&P 500 EPS will reach a range of $300-325 by 2030. This projection indicates potential growth in company earnings, despite the market’s overall flat or range-bound performance. Bannister’s forecast takes into account various factors that may impact EPS, including the tightening financial conditions and potential pressure on corporate earnings. His projection provides insight into long-term earnings potential for the S&P 500.

U.S. stocks finish mostly lower on Monday

On the day of Bannister’s forecast, U.S. stocks finished mostly lower. The Dow Jones Industrial Average (DJIA) closed down 190 points, or 0.6%, while the Nasdaq Composite (COMP) edged up 0.3%. These market movements reflect the broader market conditions and investor sentiment at the time. Bannister’s forecast takes into account such market dynamics when predicting the future performance of the S&P 500.

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Implications for Investors

Possible impact of flat or range-bound market on investment decisions

Bannister’s projection of a flat or range-bound market for the S&P 500 has implications for investors. In such market conditions, it may be challenging to achieve significant capital appreciation through traditional stock market investments. Investors may need to adjust their investment strategies and consider alternative investment options to seek higher returns. It is important for investors to stay informed and adapt their investment strategies in response to the forecasted market performance.

Considerations for portfolio diversification

Given the projected outlook for the S&P 500, investors should consider diversifying their portfolios to manage risk and potentially enhance returns. Diversification involves spreading investments across different asset classes, sectors, and geographical regions to reduce exposure to any single investment. By diversifying, investors can potentially benefit from the performance of other assets or regions that may outperform the U.S. stock market during the projected flat or range-bound period.

Re-evaluating risk tolerance

With the anticipated market conditions, investors should re-evaluate their risk tolerance. The potential absence of significant market gains may lead to a reassessment of the risk investors are willing to take. It is important to align investment decisions with individual risk tolerances to ensure comfort and manage potential downside risks. Investors should work with financial professionals to determine an appropriate risk level for their investment portfolios.

Long-term investment strategies

Bannister’s forecast highlights the importance of adopting long-term investment strategies. In a market with limited upside potential, a long-term approach can help investors weather short-term fluctuations and capture potential returns over an extended period. Long-term strategies often involve investing in stable, well-established companies and holding investments for extended periods, allowing for potential capital appreciation and dividend income over time.

Exploring alternative investment options

Given the projected market performance, investors may consider exploring alternative investment options beyond the stock market. Alternative investments, such as real estate, commodities, or private equity, can provide diversification and potentially higher returns in a flat or range-bound market. It is essential to conduct thorough research and seek advice from financial professionals when considering alternative investment opportunities.

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Market Outlook

Contrasting views on the future performance of the S&P 500

While some market participants, such as Barry Bannister, predict a flat or range-bound future for the S&P 500, others may hold contrasting views. The stock market is influenced by various factors, including economic conditions, corporate earnings, geopolitical events, and investor sentiment. These factors contribute to different forecasts and outlooks from market experts. Investors should consider multiple viewpoints and conduct their own due diligence when making investment decisions.

Factors influencing market trends and predictions

Various factors influence market trends and predictions, including interest rates, inflation, corporate earnings, labor market conditions, and geopolitical events. These factors can either propel the stock market or hinder its performance. Traders, analysts, and experts analyze these factors to make informed predictions about the future direction of the market. Understanding the key drivers behind market trends can assist investors in making informed investment decisions.

Analysis of historical market patterns

Analyzing historical market patterns can provide insights into potential future market performance. Past market cycles and trends may help identify patterns and potential turning points in the stock market. By examining historical data, investors can gain a better understanding of market behavior and potential shifts in investor sentiment. However, it is important to note that historical patterns are not always indicative of future market performance.

Expert opinions on market dynamics

Market experts offer their opinions and insights on market dynamics based on their research and analysis. These opinions may differ, and investors should carefully consider various expert viewpoints before making investment decisions. Expert opinions can provide valuable insights into potential market trends, risks, and opportunities. However, investors should conduct their own analysis and consider their individual circumstances and risk tolerance before making investment decisions.

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Possible Market Scenarios

Best-case scenario for the S&P 500

In a best-case scenario for the S&P 500, the market could experience a strong rally, surpassing previous highs, and delivering significant returns to investors. This scenario would require positive economic conditions, robust corporate earnings, and favorable investor sentiment. Factors such as technological advancements, breakthrough innovations, or positive geopolitical developments could contribute to this optimistic outcome. Investors should carefully assess the likelihood of such a scenario and incorporate it into their investment strategies.

Worst-case scenario for the S&P 500

In a worst-case scenario for the S&P 500, the market could experience a severe downturn, resulting in substantial losses for investors. This scenario would be characterized by negative economic conditions, weak corporate earnings, and deteriorating investor sentiment. Factors such as economic recessions, geopolitical conflicts, or systemic financial risks could contribute to this pessimistic outcome. Investors should assess their risk tolerance and implement risk management strategies to mitigate potential losses in a worst-case scenario.

Potential market catalysts

Several potential market catalysts could impact the future performance of the S&P 500. Economic indicators, such as GDP growth, inflation rates, and unemployment figures, can influence investor sentiment and market trends. Geo…

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