The Stock Market Has Wall Street On Its Heels

The S&P 500 is well off its October 12 low. (Source: Yahoo Finance)

Stocks climbed last week with the S&P 500 jumping 2.4% to close at 4,505.42. The index is now up 17.3% year to date, up 26% from its October 12 closing low of 3,577.03, and down 6% from its January 3, 2022 record closing high of 4,796.56.

Before dipping slightly on Friday, the S&P closed Thursday at 4,510.04, the highest level since April 2022.

It’s worth noting the S&P is now above all the year-end targets Wall Street forecasters had coming into the year.

This speaks to how difficult it is to predict short-term moves in the market when the most well-resourced, full-time professionals at the highest tier of the industry find themselves on their heels. (Almost all of these strategists have updated their targets over the past two months.)

Wall Street’s 2023 year-end targets for the S&P 500 as of Dec. 4. (Source: TKer)

What’s been driving the rally?

Well, resilient economic growth and the improving outlook for activity helps.

Cooling inflation and a Federal Reserve that’s getting less hawkish also helps.

Importantly, the improving outlook for earnings certainly helps.

“If earnings recover as the consensus expects, and if we do get a soft landing, then it's possible stocks could be on the road to new highs,” Jurrien Timmer, director of global macro at Fidelity, wrote on Wednesday.

“Currently, the consensus estimate is that S&P earnings will contract by 9% in the second quarter and then bottom in the third quarter of this year, before recovering in 2024,” he added. “If that is correct, then the rise in stocks and increase in P/Es that we have seen since last October could be justified and could continue.“

Indeed, we are in the midst of a widely anticipated mild earnings recession. But as stocks are wont to do, they appear to be pricing in the future more so than the present or past.

Nevertheless, the sentiment among Wall Street’s stock market forecasters is anything but frothy.

Even though many Wall Street strategists have revised up their 2023 targets for the S&P 500, many expect the index to end lower by the end of the year. According to Bloomberg, the average strategist’s target implies a 6.6% decline in the S&P during the second half of the year.

Strategists expect stocks to end the year lower. (Source: Bloomberg)

Who knows what stocks do in the coming months? Maybe they go up. Maybe they go down.

We do know that the outlook for earnings growth in the coming years is bullish. So it wouldn’t be too surprising if stocks end up even higher a year or two from now. This would be consistent with the long history of how earnings trend and how stocks move with those earnings.

The market spends much more time going up than down. If history tells us one thing about the difference between the bulls and the bears, it’s that the bulls are usually right.

A version of this post was originally published on Tker.co