For Wall Street strategists, the number of the week is 5,000.
In a note to clients on Wednesday, RBC Capital Markets head of US equity strategy Lori Calvasina joined Savita Subramanian's team at Bank of America in calling for the S&P 500 (^GSPC) to reach a record high of 5,000 in the coming year.
In her 2024 outlook released Wednesday, Calvasina noted that while of 2024's gains may have been pulled forward during the recent market rally, her team remains "constructive" on US equities next year.
The firm's projection for the benchmark index to hit 5,000 would reflect about a 10% move higher from current levels.
"Our valuation and sentiment work are sending constructive signals, partially offset by headwinds from a sluggish economy and uncertainty around the 2024 Presidential election," Calvasina wrote. RBC sees earnings per share for the S&P 500 hitting $232 in 2024.
Calvasina notes that many market bears have pointed to an elevated valuation for the S&P 500 in the post-COVID market as a reason for stocks to fall. But this period has shown "valuations can stay higher than many investors realize" as long as earnings continue to rise, Calvasina argues.
Investor sentiment has also been a key indicator of late, with the closely tracked AAII Investor Sentiment Survey sending a negative signal to investors before stocks sold off in the fall and flashing positive signs just before the recent upturn in November. For now, RBC believes sentiment remains "constructive."
"As of mid-November, this indicator was in the midst of a recovery but wasn't yet suggesting the equity market had gotten overbought again," Calvasina wrote.
When it comes to the economy, RBC's work is based off consensus projections for 1% GDP growth in 2024. In the firm's view, this dynamic will support growth stocks continuing to outperform value in 2024.
"For value to lead in a sustainable way, it seems likely that 2024-2025 GDP growth forecasts will need to be revised substantially higher," Calvasina wrote.
The team at RBC has also been highlighting an attractive opportunity in small caps over the past few months and sees that trend continuing. RBC believes investors have been too worried about the impact of higher interest rates on small caps, even if they have more short-term debt than S&P 500 companies.
"We think it's a good time to add exposure here," Calvasina said. "Our work on small caps has been suggesting that this segment of the equity market has been oversold."
Since the start of November, the Russell 2000 is up nearly 8%.
Bonds have also played a key role in the stock market this year, with a surge in yields pressuring stocks through September and October.
Since reaching 16-year highs in mid-October, the 10-year Treasury yield has dropped about 60 basis points while the S&P 500 has rallied 10% during that period.
In Calvasina's model, the S&P 500 rises about 10% next year while the 10-year Treasury yield falls from about 4.4% today to 3.74% by the end of 2024. And Calvasina's work suggests stocks are likely to remain sensitive to yields in the year ahead.
"Our work also suggests that the greater appeal of bonds may end up being a dampener of US equity market returns but not necessarily a derailer of them," Calvainsa wrote.
Josh Schafer is a reporter for Yahoo Finance.
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