A seasoned strategist, Barry Bannister from Stifel, has been a step ahead in predicting the market's trajectory for 2023. His recent report suggests that stocks are likely to hit a plateau for the remainder of this year and possibly struggle in 2024. Bannister argues that this lackluster performance can be attributed to corporate earnings growth falling short of Wall Street's overly optimistic expectations.
Bannister's projection indicates that the S&P 500 (SPX) will trade sideways, concluding at around 4,400 points by the end of the year, as per FactSet data. Although this may seem a bit disheartening, investors need not lose hope as there are still opportunities to be found in sectors that have lagged behind the market leaders.
Under this framework, Bannister recommends exploring "pair trades" by shorting prominent Big Tech stocks while simultaneously investing in financials, materials, industrials, and other cyclical growth stocks that have been underperforming. Furthermore, he anticipates that the equal-weighted S&P 500 index (RSP) will outperform the traditional capitalization-weighted S&P 500 in the latter half of the year.
If we evaluate the past month, these strategies have already proven profitable. Since mid-July, when corporate earnings season commenced, the equal-weighted S&P 500 has surged by 2.4%, surpassing the 1.6% increase seen in the traditional S&P 500, according to FactSet data.
Bannister's shorts have also yielded favorable results. Several members of the renowned "Magnificent Seven" megacap technology stocks have started to decline as recommended. For instance, Apple Inc. (AAPL) has decreased by 6.6% to $178.19 per share, while Tesla Inc. faces an 11.8% drop to $242 per share. In contrast, Nvidia Corp. (NVDA), the stock that has profited immensely from the artificial-intelligence boom, remains relatively stable.
Given Bannister's accurate predictions so far, investors would do well to heed his insights as they navigate the market moving forward.
Bannister's Contrarian View on Stock Market and Inflation
Early this year, Bannister, an astute observer of the stock market, challenged the consensus view shared by analysts at prominent financial institutions such as JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group, and others. While these analysts predicted that stocks would reach new lows in the first half of 2023 before bouncing back later in the year, Bannister defied the popular opinion by foreseeing a retreat in U.S. inflation.
In a surprising turn of events, Bannister's prediction came true. Recent Consumer Price Index (CPI) data reveals that in June, consumer prices only rose by 0.2%, representing the slowest inflation rate in two years, even lower than economists had anticipated. In order to stay updated on the state of U.S. inflation, investors eagerly await the release of Thursday morning's report.
Now, Bannister believes that the slowdown in inflation is reaching its limit. However, he goes on to state that the stock market might struggle not only in 2023 but also in 2024. This projection is primarily rooted in Wall Street's high expectations for corporate earnings growth, which Bannister believes will ultimately fall disappointingly short.
For 2024, both Bannister and Stifel predict that the S&P 500 aggregate earnings per share will amount to $209, a figure largely unchanged from analysts' expectations for 2023. This contrasts with the Wall Street consensus estimate of $226.
Bannister emphasizes that if his flat earnings-per-share (EPS) outlook holds true, the S&P 500 could potentially remain stagnant. He expressed this sentiment in a client communication, noting that a mild recession is anticipated to take place in the first quarter of 2024, while escalating oil prices might trigger a mini-price shock, resulting in a 3% inflation rate becoming the new baseline. Consequently, the Federal Reserve would face challenges justifying interest rate cuts.
Furthermore, Bannister argues that sluggish economic growth will also negatively impact corporate profits. Compounding the issue is the fact that the surge in earnings growth caused by COVID-19 stimulus measures in 2021 will make year-over-year comparisons difficult for companies in the coming years.
Yesterday, the U.S. stock market experienced a decline, prolonging the slump that began in early August. The S&P 500 witnessed a loss of 31.67 points, equal to 0.7%, closing at 4,467.71. Similarly, the Nasdaq Composite dropped 162.31 points or 1.2%, settling at 13,722.02. The Dow Jones Industrial Average also faltered, losing 191.13 points or 0.5%, to reach 35,123.36.
