The stock market has been on a remarkable rally, with the S&P 500 posting a 20% gain this year. However, there are signs that this surge may be coming to an end, and investors should be prepared for potential dips in the market.
Factors Driving the Recent Rally
The recent rally in the stock market has been fueled by two key factors. Firstly, Big Tech stocks have been leading the gains, benefiting from the optimism surrounding new opportunities in artificial intelligence. This has unlocked additional revenue streams for these companies, driving up their stock prices.
Secondly, non-tech stocks have also joined the rally in the past few weeks. This surge is attributed to growing investor confidence that the Federal Reserve will halt its interest rate hikes and potentially cut rates if inflation continues to decline.
Impending Recession Risk
Despite the market's upward trajectory, there are concerns about recession risk that could lead to a significant decline in stock prices. Economic growth, which exceeded expectations in the last quarter, is projected to slow down due to high interest rates that aim to cool down the economy. While the effects of higher rates have already been witnessed in certain areas such as retail spending, it will take some time before the full impact is felt. Slower growth could put additional pressure on earnings estimates in the coming months.
According to Citi strategist Scott Chronert, "Recession risk likely persists as the lagged effect of higher interest rates manifests in softer macros."
An Opportunity for Savvy Investors
Despite the potential downturn in stock prices, investors should view any drop as an opportunity to buy rather than sell. Many market strategists predict a short-term decline for the S&P 500 followed by a subsequent climb. Citi forecasts a target of 5,100 for the S&P 500 by the end of 2024, indicating a potential 10% gain from current levels. Julian Emanuel, a strategist at Evercore, shares a similar view, calling for "stocks down first, then up," and setting a target of 4,750 for the end of 2024.
Citi Predicts Strong Future for S&P 500
Citi, a leading financial institution, has expressed optimism about the performance of the economy and earnings in the coming years. Despite potential turbulence in the next few quarters, Citi believes that a brief early-year recession can be offset by growth in the latter part of the year.
One key factor in this forecast is the expectation that the Federal Reserve will either halt its rate hikes or even cut rates, which would stimulate economic activity. If this happens, Citi predicts that the S&P 500 will generate earnings per share of $245 for 2024, reflecting a 12% year-over-year growth.
While consensus sales for the S&P 500 in 2024 are projected to grow modestly, combining this with controlled increases in expenses and ongoing stock buybacks could lead to higher profit margins and an increase in earnings per share. Citi's analysts even suggest that the S&P 500 could trade at 21 times EPS for 2024, surpassing its historical average of 20 times.
Given these expectations, strategists foresee record highs for the S&P 500 in the new year, as long as inflation remains low, the economy stays relatively stable, and the Fed leans towards rate cuts rather than increases. Additionally, lower interest rates may make bonds less appealing compared to stocks.
In light of these findings, Citi proposes a simple strategy for investors: "Buy pullbacks."