Topline
Bank of America raised its year-end price target for the S&P 500 by 8% this weekend, citing the recent optimism backing a months-long stretch of gains, though there’s a variety of factors emerging that question the likelihood of a sustained rally.
Key Facts
Bank of America analysts, led by Savita Subramanian, raised the firm’s S&P target from 4,000 to 4,300 in a Sunday note to clients, citing companies’ cost-cutting efforts in recent months, as well as the artificial intelligence boom that’s fueled a resurgence in a crop of technology stocks.
That’d be the S&P’s highest level since August, though it’s just 2% higher than the index’s 4,200 level Monday.
Bank of America’s bullish forecast came amid a flurry of far more cautious predictions from Wall Street, led by Morgan Stanley’s ever-bearish head U.S. strategist Michael Wilson, who wrote Sunday that the S&P’s nearly 15% gain over the last six months is little more than a “head fake rally” fueled by mass “panic buying.”
Optimism fueled by AI advancements, a less aggressive Federal Reserve and a lack of fresh geopolitical disturbances won’t “prevent the deep earnings recession” on deck later this year, as higher interest rates continue to eat at economic growth, Wilson explained.
Prior market data support Wilson’s bearish take for the S&P: A JPMorgan technical group, led by Jason Hunter, said Monday the most “likely outcome” for the index over the next few months is to crash as low as 3,500, a 17% decline which would send the market to a near three-year low.
Key Background
The S&P’s strong start to the year follows its worst year in over a decade, when it shed 19% as investors reacted to the Fed’s dramatic reversal on its easy-money policies throughout the pandemic, which allowed the index to rally to an all-time high. This year, easing inflation, slowing rate hikes and fairly rosy corporate earnings have supported bullishness, and not even a historic banking crisis in March could roil markets. Still, almost all of the S&P’s gains are concentrated in a handful of mega-cap technology stocks, with the market’s lack of breadth posing concern for many on Wall Street.
Crucial Quote
The idea of no materially bad news, such as an unexpected further rise in inflation or monumental geopolitical event akin to Russia’s invasion of Ukraine, driving stocks higher is “long in the tooth” and can’t hold up the S&P much longer, Tom Essaye of the Essaye Report wrote Monday. There needs to be “actual positive resolution” from tense market-driving events to justify further gains for the S&P, he added.
What To Watch For
Investors are paying close attention to the ongoing deadlock over the U.S. debt ceiling, as the U.S. flirts with the first default on its debt in its nearly 250-year history. And even if the U.S. avoids a default, the rising of its debt limit “may ironically be the catalyst that ends this bear market rally” due to the ensuing liquidity crunch posed by the Treasury Department’s likely issuance of bonds.
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