Stocks have further room to rise in 2023, according to Stifel Equity Research. The firm boosted its price target for the S&P 500 (^GSPC) from 4,200 to 4,400 in a new note on Sunday.
“There are encouraging signs of economic resilience in mid-2023, which is historically favorable for Cyclical positioning rather than a Defensive posture,” Stifel equity strategist Barry Bannister wrote. “We also forecast inflation to slow sharply, but not to the too-low range of 1-2% which existed in 2009-19, itself a disinflationary anomaly.”
After posting their worst year since 2008, stocks have rallied to start 2023. The technology-heavy Nasdaq (^IXIC) is up more than 16% while the S&P 500 is up over 7% and the Dow Jones Industrial Average (^DJI) sits higher by about 1.3%.
Stifel points to historic data that shows stocks have risen in the year after inflation peaks (inflation peaked this cycle in June 2022 at 9%). This provides a solid setup for cyclical growth names in the media & entertainment, semiconductor, technology autos and retail sectors, according to Stifel. Tesla (TSLA), which Stifel singles out in the autos sector, is already up nearly 40% year-to-date.
Roughly 85% of the S&P 500 have reported earnings, and 71% of companies have beat estimates, according to Factset. Add in a potential rebound in the ISM PMI Manufacturing Index beginning in the current quarter, and the picture becomes more positive, according to Stifel.
PMI, which is seen as a leading indicator for the S&P 500, turned positive on a monthly basis for the first time in two years in April. The 47.1 print in April still came in below 50, which typically indicates that the manufacturing sector is generally contracting.
‘A show about nothing’
Even if the S&P moves higher, it's unclear how long a rally will last.
Evercore ISI Macro research analyst Julian Emmanuel points out in a note that the S&P 500 has been largely range bound between 3,800 and 4,200 over the past seven months. That tight range has been maintained despite a regional banking crisis, an A.I. investment boom and historic volatility in bond markets.
“The S&P 500 has been 'A Show About Nothing' which is about to enter its seventh month of reruns,” Emmanuel wrote in a note to clients, in a reference to the 1990's hit show "Seinfeld."
In the near-term, the nothingness likely ends with some downside risk, Evercore argues. This episode of the S&P 500 is playing out very similarly to 2011.
Back then, stocks rallied into a debt ceiling crisis. The subsequent debt ceiling drama sent stocks lower in 2011, and Evercore sees similar dynamics playing out this year as parties in Washington don’t appear close to a solution with just weeks before Treasury Secretary Janet Yellen believes the U.S. will default on its debt.
But just as being dubbed ‘a show about nothing’ isn’t necessarily a bad thing for one of the most popular sitcoms of all-time, it’s not all bad for stocks either.
Nothing always turns into something, and that something is often bullish in the long term, Evercore argues. The 1970s sideways trade ended with a long bull run in the 1980s. An aggressive Federal Reserve rate hike period in 1994 kept markets range bound before bursting to the upside once the hikes eased.
So what’s an investor to do when the market is a show about nothing? Hold cash and build the shopping list, Evercore says. The debt ceiling drama will unfold. The Fed will decide its path forward on interest rate hikes. Then, yada, yada, yada, the bull market comes and stocks rise again.
“Over the long term, the natural upward progression of stocks has meant that “Nothing” will eventually resolve itself bullishly, even as there are differing outcomes in the medium and shorter terms,” Emmanuel wrote.
Josh is a reporter for Yahoo Finance.
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