Wall Street is becoming even more cautious about Equity Investments

Wall Street is becoming even more cautious about equity investments

Wall Street doesn’t think this rally is over, either, as the outlooks for earnings and economic growth have steadily risen throughout the year.

Nearly five months through 2024, the major stock indexes are near record highs.

In the past two weeks, three equity strategists tracked by The Wall Street have boosted their year-end targets for the S&P 500. The median target on Wall Street for the benchmark index now sits at 5,250, up from the median target of 4,850 on Dec 30.

As Ohsung Kwon of Bank of America US and Canada equities said the current environment “is basically what the bulls were hoping for, and they are getting it.” “It’s a soft landing essentially.”

Price increases haven’t accelerated, Kwon said, even though inflation figures came in higher than expected at the start of the year. Still, other statistics point to a strong but slowing economy, easing worries that quick growth may send inflation skyrocketing once more. This, according to Kwon, has confirmed the story of a soft landing that Wall Street bulls had anticipated entering the year.

The Street-high target has moved up to 5,600 from 5,200 to start the year too.

Wall Street is becoming even more cautious about equity investments
Wall Street is becoming even more cautious about Equity Investments 3

Chief investment strategist Brian Belski of BMO Capital Markets says markets have changed significantly since this data arrived. The above data shows that, compared to a peak of over seven at the start of the year, markets are now pricing in about two rate cuts this year. This is in line with the most recent projections from the Fed, which stated that officials wanted to cut rates by two or three times this year.

Belski said in a May 15 research note, “It has become clear to us that we underestimated the strength of the market momentum, particularly considering that investor expectations and Fed policies have become essentially aligned VS. the significant disconnect that existed at the beginning of the year.”

On that note, Belski increased his year-end target from 5,100 to 5,600, a new Wall Street high. He noted that greater gains are most likely in store considering the stock market’s momentum at the start of the year.

Belski looked at historical data, and in years where the S&P 500 climbs more than 8% in the first five months of the year, as it did recently, the index rose more than 7% to close the year 70% of the time.

Belski noted that, in comparison to the usual more than 9% loss seen in the second year of bull markets, the 5% decline in April was negligible.

However, Belski said that “should a more severe pullback happen, it will likely occur at higher index levels than we previously anticipated,” considering the stock market’s early-year rise. This would provide the S&P 500 with a higher landing place in the event of a comeback.

Talking about the bullish market on Wall Street

Bullish Wall Street analysts were certain that an ongoing rise in corporate earnings would be crucial to this year’s market advance at the beginning of the year. And that has been the case thus far. In 2024’s first quarter, earnings increased by 6%, marking the fastest growth rate in over two years.

The factors influencing salaries haven’t altered all that much thus far. Most of the S&P 500’s earnings growth is being driven by tech companies, such as Nvidia, which had an incredible quarter last Wednesday. The groundwork, according to analysts, is still there for an expansion until the end of 2024.

Kwon pointed out that while IT giants like Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT) invest in the burgeoning technology, the first stage of the AI cycle has already begun, with earnings at businesses like Nvidia (NVDA) increasing. But, thanks to recent rises in industries like energy and utilities, the benefits are beginning to increase.

“We don’t think it’s just about Nvidia anymore,” Kwon stated. “Things are getting larger. Power, commodities, utilities, and such items.”

In a recent research note, Kwon pointed out that 37% of the S&P 500’s earnings increase during the previous month was driven by Nvidia. In the upcoming year, it is anticipated to amount to a mere 9%.

Binky Chadha, chief equities advisor at Deutsche Bank, also thinks that strong profit growth will continue through the year in other S&P 500 sectors. Although he raised his aim for the S&P 500 from 5,100 to 5,500 recently, he said that the new target includes obvious “risks to the upside.”

Firstly, Chadha points out that even if people are “talking bullish,” there hasn’t been much of a movement in equities stance over the last three months. Investors are “overweight” in stocks, according to Deutsche Bank’s positioning metric, but not to the “extreme” levels seen in 2021 and 2018.

Chadha believes this indicates that equities may still have the opportunity to rise, especially as he believes the mainstream isn’t currently factoring in an outperformance of the US economy.

Chadha emphasizes that forecasts for the US economy are now at or below average trend growth instead of an impending recession. It’s not difficult to picture the S&P 500 reaching 6,000 if that consensus keeps moving higher and the US economy expands more than anticipated this year amid what some speculate may be a productivity boom for the US workforce.

“We’ve come a long way, but we don’t seem to have finally come all the way,” Chadha stated.

Read More:

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