Wall Street Debates S&P 500’s Outlook for the Second Quarter
In the first three months of the year, stocks ripped higher, fueled by investor confidence in ongoing economic stability in the United States (source). The attention has now shifted to Wall Street’s central debate for the second quarter: whether there is more room for the S&P 500 to rally after its best start since 2019. Analysts and traders remain divided on the potential trajectory the market will take (source).
An Expanding Market Rally
Over the past few months, the market rally has broadened, transitioning from a few stocks driving the major averages higher to investors flocking to sectors sensitive to economic shifts, such as Materials (XLB) and Industrials (XLI). With the belief that the US economy will continue to grow as inflation falls closer to the Fed’s 2% target, investors are hopeful for a soft landing scenario (source).
However, some market participants anticipate a possible pullback after five consecutive months of positive momentum for the S&P 500. Citi US equity strategist, Scott Chronert, suggests that a period of digesting these gains is necessary, allowing fundamentals to catch up with the current price action (source).
Conflicting Forecasts for the S&P 500
Both the equity strategy team at Goldman Sachs and Chronert favor caution, despite maintaining relatively positive forecasts for the S&P 500. Goldman Sachs maintains a year-end target of 5,200 for the benchmark index but acknowledges the possibility of other scenarios and downside risks. Chronert’s call for the S&P 500 stands at 5,100 but is awaiting stronger confirmation of economic growth and earnings. Goldman Sachs explores four different scenarios in a recent research note, including potential earnings disappointments in large-cap tech and the market impact of the Federal Reserve’s response to inflation (source).
The Most Likely Outcome
While some resonate with downside scenarios, concerned with recent inflation readings and potential shifts in the Federal Reserve’s interest rate strategy, others remain optimistic. The prevailing sentiment on Wall Street is that the current leg of the rally is likely to continue, with a potential increase in earnings across various sectors and a robust economic outlook. Investors are advised to stay in the US equity market as the upside risks are believed to outweigh the downside risks (source).
Upbeat Scenarios and Bullish Sentiment
Goldman Sachs examines two additional scenarios that suggest at least 10% upside for the benchmark average. The first scenario involves further outperformance from Big Tech, leading to elevated valuations within that sector. The second scenario predicts a continued broadening of the market rally, with increased earnings from sectors outside of megacap tech, all supported by a favorable economic outlook. The rally seen in March, with Energy (XLE) and Materials leading the sector action, appears to be an extension of the current positive market sentiment (source).
Goldman Sachs equity strategist, Ben Snider, remains constructive and advises investors to stay invested in the US equity market, considering the favorable economic conditions and the unlikeliness of a recession. Deutsche Bank’s chief global strategist, Binky Chadha, shares the sentiment, noting their increased confidence in their bull case for the S&P 500 this year, with a target of 5,500 (source).
The Current Market Landscape
Since Deutsche Bank revised its recession call in February, the equity strategy team has experienced growing confidence in their positive outlook for the S&P 500. Deutsche Bank’s research indicates that the rally in stocks has brought a significant inflow of $260 billion into the equity market since May, in line with positive macro data. Risk appetite remains moderate, as the current market sentiment is a far cry from the excesses seen in previous speculative rallies (source).
In conclusion, Wall Street is fiercely debating the future trajectory of the S&P 500 for the second quarter. As the market rally has shown signs of broadening, driven by sectors sensitive to economic shifts, opinions vary concerning the continuation of the rally. While some analysts anticipate a pullback, others remain optimistic about the prospects of the current leg of the rally. With downside risks closely monitored, the prevailing sentiment supports staying invested in the US equity market due to the belief that upside risks will outpace the downside risks (source).
