As economic data consistently surpasses expectations, economists are revising their projections for a recession, which, in turn, is prompting Wall Street strategists to adopt a more positive outlook on stocks.
Jefferies, on Tuesday, elevated its year-end target for the S&P 500 from 4,050 to 4,500.
“As a soft landing is the more likely outcome now, earnings will be much more resilient than previously expected,” said Jefferies global head of microstrategy Desh Permunetilleke.
While the Artificial Intelligence rally that propelled price targets higher before summer has cooled off during the second quarter earnings announcements, strategists are now shifting their attention to the robust U.S. economy as the forthcoming catalyst to bolster the market rally.
From a recent Federal Reserve press conference featuring references to Taylor Swift and Barbie, to a pleasantly surprising Gross Domestic Product (GDP) performance in the second quarter, the narrative of the summer of 2023 has prominently featured the resilient spending habits of the US consumer, surpassing many initial expectations.
With each positive data point that exceeds predictions, discussions about the possibility of a “soft landing” conclusion to the Federal Reserve’s series of rate hikes have grown more intense. This concept envisions a scenario where inflation steadies without significant economic contraction, and it has become the latest focal point for strategists explaining why the S&P 500 is poised to conclude 2023 at a higher level than initially forecasted.
On July 31, Scott Chronert, Managing Director at Citi, revised his projection for the 2023 closing price of the S&P 500 from 4,000 to 4,600, and adjusted the mid-2024 target from 4,400 to 5,000. Chronert’s new target reflects an “increased likelihood of a soft landing.” Following suit, on August 1, Oppenheimer Asset Management raised its S&P 500 year-end price target from 4,400 to 4,900.
Constituting approximately 70% of the US GDP, personal consumption has demonstrated robustness, and numerous contributing indicators underline this resilience. Although the labor market has eased from its pandemic-induced peak, it continues to generate employment alongside an historically low joblessness rate and escalating wages. Initial signs suggest that consumers have sustained their spending habits as the third quarter commenced, as highlighted by the July retail sales report, which indicated a 0.7% increase in sales during the month.
While not characterized as exceptionally strong, economic metrics are displaying indications of what Goldman Sachs chief economist Jan Hatizus has termed “moderate growth.” This level of growth could potentially sustain elevated stock prices and concurrently present opportunities for investment in specific sectors.
Recently, Bank of America upgraded the consumer discretionary sector (XLY) from Underweight to Overweight on Monday. This decision was based on the bank’s economics team’s recent projection that the Federal Reserve’s sequence of interest rate increases will not culminate in a recession.