After a decent, though uneven, run for stocks from January through the end of June, the stock market forecast for the next six months through the end of the year remains mildly bullish. Big gains in tech stocks, from cloud computing and generative AI giant Microsoft to digital transformation play ServiceNow to data analytics innovator Palantir Technologies, a favorite among individual investors that went public less than three years ago, have excited investors.
Judging by the past several months of action in the stock market, indeed it appears the animal spirits have returned — and even sticking around a little longer.
Take, for instance, the market action in both July and July. Stock gains accelerated across the broader market.
In July, the S&P 500 gained another 3.1%, the Nasdaq composite 4%, and the Dow Jones Industrial Average of blue chip names nearly 3.4%. This follows sharp rises in the 4% to 6% range in June.
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August, however, showed a little rough sledding.
The S&P 500 eased 1.8% for the month. The large-cap benchmark halted a five-month winning streak, yet it also cut losses following sell-offs during that month.
The Nasdaq composite, undisputed leader among major equity indexes in the U.S. this year, pulled 2.2% lower for the month, while the Dow industrials cooled 2.4% from Aug. 1 through Aug. 31.
And September? It turned out to be a more brutal sell-off. The Nasdaq finished with a 5.8% decline, its worst performance since an 8.7% shellacking in the final month of 2022.
Meanwhile, the bears took down the S&P 500 by 4.9%, significantly more than a 3.5% slide by the Dow industrials.
The major indexes have so far failed to rebound in October, but it's also still early in earnings season.
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Beyond top tech stocks, strong moves by consumer growth companies, such as Amphastar Pharmaceuticals (maker of both proprietary and generic medicines that ranked in the top 10 of the IBD 50 earlier this year), hot daily sports wagering platform DraftKings, and midcap cosmetics marketer ELF Beauty — up as much as 260% from a July 2022 breakout past a cup with handle and a 33.44 buy point — have added quality leadership to the market.
DraftKings is molding a new base that, for a while, looked like a cup with handle. Yet amid the current market correction, DKNG's pattern still needs a bit more time to form.
Amphastar shares, meanwhile, have gotten rocked since August.
In the week ended Aug. 11, the small cap biotech went from a 7.7% gain to a 12.9% loss. That's the biggest decline since an 18% sell-off during the week ended April 28. The stock also undercut its 10-week moving average in hefty trade.
That justified selling the stock and locking in solid gains since Amphastar's breakout from a handle on the long base at 38.22. Today, it's still in deep base-building mode while trying to put the brakes on the slide at the long-term 40-week moving average.
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Meanwhile, the sanguine outlook for U.S. stocks could darken quickly if investor expectations for corporate earnings, interest rates and stability of the banking industry take a turn for the worse.
In fact, the week ended July 7 saw both stocks and U.S. Treasury bonds fall together in price. With expectations of a new quarter-point rise in the fed funds rate by the Federal Reserve back in July right on target, the yield on the benchmark 10-year Treasury bond jumped to as high as 4.09% on July 7.
The benchmark 10-year bond yield plunged to as low as 3.73% on July 19. And back in April, it squatted near 3.25%. But long-dated Treasuries have sold off again. Over the past few weeks, sellers have pumped the 10-year yield up at one point past 5%, according to Cboe market data.
That's a new 17-year high.
On July 26, the Federal Reserve ended the brief pause in its monetary tightening campaign with a quarter-point rise in the fed funds rate. The move lifted the target range of overnight loans to large banks to 5.25%-5.5% — the highest level since March 2001.
At the Federal Reserve confab on interest rates that took place on Sept. 19-20, the bank kept the fed funds rate unchanged. But the Summary of Economic Projections (SEP) showed Fed officials doing two key changes in thinking. One, they lifted the median GDP growth forecast in 2024, indicating the chances of a recession are slimming. Two, they no longer felt that the bank would need to conduct four rate cuts of a quarter point each next year, but perhaps only two.
At a meeting of central bank chiefs in Jackson Hole, Wyo. in late August, Fed chief Jerome Powell made it clear that the Fed would not alter its long-range goal of bringing inflation back to a 2% long-term rate. Translation: Expect additional rate hikes.
Meanwhile, the risks don't end at U.S. borders. A diplomatic or military event, such as an escalation of the Ukraine-Russia war, could chill investors' mood. The surprise attack by Hamas on Israel earlier this month affirmed this point.
Meanwhile, investors are clearly showing concern about deflation and rocketing unemployment among young adults in China, the world's second-largest economy, as well as the potential risk of war breaking out in East Asia if China were to invade Taiwan.
SPDR S&P China, a popular China equities exchange traded fund, finished the first half of 2023 down a disappointing 6%. On Tuesday, GXC shares rebounded nearly 3% to 69.58 and remain underwater for the year.
Federal Reserve's Rate-Cut Hopes Dim In 2024
Stock Market Forecast For S&P 500 At Year's End
The Federal Reserve is likely not done raising the cost of money to tame inflation. So, interest rates may remain top of mind for investors. Even after recent encouraging data showing inflation cooled further in May, Wall Street still eyes the possibility the U.S. central bank could raise short-term interest rates by 25 basis points later in the year, quite possibly in December. But as noted by a number of Federal Reserve governors over the past few weeks, the strong rise in long-term interest rates have in effect been helping do the bank's job of tightening credit conditions, putting additional downward pressure on the economy and hence prices as well.
The Fed holds its final meeting on interest rates, known as the FOMC, on Dec. 12-13. Investors will again tune in to the central bank's latest comments on the economy, inflation, and the future prospects for additional monetary tightening.
Nonetheless, market veterans see a touch of gains in stock prices ahead.
Let's recap the first six months of 2023. The S&P 500 finished strong during the final week of June, rising nearly 2.4%. It more than recouped the prior week's 1.4% decline. At 4450, the large-cap benchmark etched its highest weekly close since the week ended April 8, 2022.
In late July, the 500 added gains and reached 4607. It hit levels not seen since April 2022. But it has since backtracked 9%, not quite enough to place the S&P 500 into an intermediate-level correction.
Please read this Oct. 20 Big Picture story on why the IBD outlook for the stock market got a fresh downgrade.
Earlier in June, the S&P 500 had already barreled past many Wall Street firms' forecasts that it would hit 4200 to 4300 by year's end.
Veteran market observer and economic forecaster BCA Research, in an early-June report titled "So Far, So Good On The Road To 4500," feels "vindicated" that the large-cap stock index at one point pulled to within 2% of its 2023 year-end forecast. But its optimism for the second half of the year? Clearly bridled.
First Half 2023 Vs. First Half 2003
"We remain tactically overweight equities but are preparing to transition to equal weight once the S&P 500 reaches 4500," the research firm wrote June 18. "Although the index may well peak above our target, we do not expect the rally will last beyond the summer."
One reason? BCA thinks Wall Street's forecasts for stocks will "become too buoyant" but "negative surprises will ensue" on the corporate earnings front. BCA also predicts an economic recession will arrive in the first half of 2024.
Howard Rosenblatt at S&P Global Intelligence noted that in 2003, the top 10 stocks accounted for 30.4% of the total return in the S&P 500 during the first six months of that year. They included General Electric, Citigroup, Pfizer, Cisco Systems and Amgen.
So, how about in 2023? The top 10 firms accounted for 37.4% of the total gains in the first half of this year. Just three of the 10 came from outside tech: Berkshire Hathaway, which does have tech stocks in its investment portfolio, Eli Lilly and JPMorgan Chase.
Stock Market Today
Meanwhile, the tech-fortified Nasdaq composite finished the last week of June and the quarter on a strong note.
At 13,787 on June 30, its 2.2% weekly gain eclipsed the prior week's reasonable loss of 1.4%. The Nasdaq finished the second quarter with a 12.8% jump. It's pole-vaulted 31.7% during the first six months of 2023.
In July, the Nasdaq rallied to as high as 14,446. But in recent days, the Nasdaq broke below 13,000 and could come into contact with its still-rising 200-day moving average.
Small caps are still lagging.
The Russell 2000 advanced almost 8% in June alone to 1888, then jumped another 6.1% in July. A weekly chart also revealed technical buying support for the Russell small-cap gauge during last week's pullback. Bullish action. Small and medium lenders, which make up a big chunk of the Russell 2000, have rebounded amid positive news on the Federal Reserve's stress tests on the nation's biggest lenders.
But now, the Russell 2000, recently trading at 1673, has lost all of its 2023 gains and then some. The popular gauge lost more than 11% over August and September combined.
Also in September, the Russell has slumped below the 200-day moving average, a no-no during a healthy bull market. It now trades more than 32% below its November 2021 all-time peak of 2458 — clearly bear market territory.
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Corporate Earnings, Inflation, Interest Rates
Hard-core pessimists among those giving a concrete stock market forecast for the next six months include Mike Wilson, chief U.S. equity strategist at Morgan Stanley. As of June 5, he predicted the S&P 500 will slump to 3900 by year's end, the Wall Street Journal reported. Why? He sticks with the thesis that S&P 500 corporate earnings could drop 16% this year to a cumulative $185. The FactSet consensus? Growth of nearly 2%.
Apply a price-to-earnings ratio of 20 times Wilson's earnings estimate and you'll get a dour 3700 target by the end of December.
This would mean the S&P 500 would have to fall more than 15% from here. Such a drop would qualify as an intermediate-level correction.
Looking at more recent earnings forecasts, as of data on Oct. 2, the consensus forecast for S&P 500 operating earnings stands at $220.83, up from $219.43 on Aug. 10, according to Yardeni Research. The 2024 forecast calls for $247.49.
So, with the S&P 500 at 4288 as of the end of the third quarter, it continues to trade slightly more than 17 times expected 2024 earnings. Definitely not cheap, but less expensive than in July.
Today, at 4225, the S&P's valuation really hasn't fallen much.
One More Rate Hike To Go In 2023?
CME FedWatch in recent days now shows only a 29% possibility of at least a quarter-point rate hike at the final meeting this year on Dec. 13.
A June U.S. jobs report indicated the labor market is still quite tight and nonfarm payrolls continue to grow. However, recent data on June consumer prices — up 3% year over year, down from a 4% lift in May, while core prices rose 4.8%, down from 5.3% in the prior month — eased some concerns that the U.S. central bank will continue to hike rates sharply during the back half of 2023.
The July jobs report showed a lingering low level of unemployment at 3.5%, down from 3.6% in June. But payroll grew just by a net 187,000 jobs, below the Econoday consensus estimate for 200,000. The August jobs report showed wage growth slow and payrolls growing at a milder pace. The unemployment rate edged up to 3.8% vs. 3.5% the prior month.
Please check out this new article on why the July JOLTS report on job openings and labor turnover encouraged institutional buying in equities. Meanwhile, the August JOLTS data further strengthened the case that the Fed's nearly dozen rate hikes have influenced employers' moves to seek more workers.
Earlier in August, the government announced that U.S. GDP rose 2.4% at an annualized rate, based on the first reading of economic data. This followed a final reading of Q1 growth of 2%. The final GDP figure showed 2.1% annualized growth for Q2. No doubt, these figures are helping to keep the embers for a new rate hike from extinguishing.
Meanwhile, equity indexes rallied on Wednesday on a weak September private-sector jobs report from ADP.
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Stock Market Performance In 2023
U.S. stock market gains in the first half of 2023 have been rosier than some entire years in the past. This alone raises the risk for a spill in prices.
The S&P 500's rise in 2023 reached almost 16% in mid-June. That surpassed full-year gains in 2010 (up 15.1%), 2011 (2.1%), 2014 (13.7%), 2015 (1.4%) and 2016 (12%).
The gains have been concentrated, though.
Consider Palantir, which has carved a niche in AI-applied data analytics for both the government and private sectors for years. PLTR stock had soared as much as 167% since Jan. 1 before its current pullback near 14.
Due not only to its mini-rocket-like move since clearing resistance at 10 but also to two quarters in a row of solid top- and bottom-line growth — earnings up 100% and 150% in Q4 2022 and Q1 2023, respectively, on revenue gains of 17% and 18% — Palantir has achieved a top-flight 99 Composite Rating. It has fallen only a touch, to a 96 in recent days.
In the week ended Sept. 29, PLTR has retaken its fast-climbing 10-week moving average. The action had for a while resembled a potential high, tight flag, one of the rarest chart patterns among big stock market winners. But its breakout attempt past a 17.16 buy point in late July fizzled.
The stock is now carving a new base. That's good. Plus, the relative strength line on PLTR's daily chart has been rising again since mid-September.
Please read this story on a new contract win for Palantir in the U.K.
Leading The Magnificent Seven
Among other tech stocks, ServiceNow (99 Composite Rating, 99 Earnings Per Share Rating and 92 Relative Strength, according to IBD Stock Checkup) and other enterprise software giants and smaller, newer firms have garnered oodles of attention and investor dollars amid the rush to develop new products, services and platforms that leverage artificial intelligence.
NOW created a new cup pattern that provides a 614.36 buy point before a second sell-off started this past month. Perhaps the cup has now morphed into a double-bottom base. The stock has kept its place on the Watchlist of IBD Leaderboard. But NOW hasn't broken out yet.
The entry point from the double bottom is 607.90.
Another View Of The S&P 500's Performance
What if we remove the market's upward bias produced by big tech stocks? The Invesco S&P 500 Equal Weight exchange traded fund was up as much as 10% at its Feb. 2 peak this year. Now, those gains have shrunk to a bland 0.3% as of the end of the third quarter.
Meanwhile, 2023 has not ushered in a bull market at all for commodities so far.
In 2021, oil and gas stocks and metal miners helped boost the equity indexes. That's not the case today. Of course, this has implications for the overall breadth of the stock market's advance.
West Texas Intermediate crude oil futures have rebounded nicely. On the NYMEX back in June, crude traded at $70.45 a barrel, 46% below its March 2022 peak of $130.50. WTI crude has recently hit $95.03 before pulling back below $90.
Gold futures, which edged lower at the end of June to $1,919 an ounce, have likely disappointed traders with a 5.3% gain through June 30 year to date. And the precious metal has since weakened. Front-month gold futures recently traded at $1,984 an ounce, but had threatened to go negative for the year.
September-expiration copper, falling to $3.62 per pound, lies almost 27% below a March 4, 2022, peak of $4.93 per pound.
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Stock Market Forecast For The Next Six Months
Yet for the courageous investor who seeks to carve out gains by picking individual stocks, the stock market forecast for the rest of 2023 appears bullish. In fact, quite bullish.
The median gain this year through June 22 within the IBD 50 list of top growth stocks? A whopping 48%. At least five companies, including semiconductor equipment firm Axcelis Technologies, IoT play Samsara and small-cap Symbotic have vaulted 100% or more.
Even some old leaders of the dot-com bubble in tech stocks have shown some mojo. Oracle (89 Composite Rating, 91 EPS Rating, 91 Relative Strength Rating) has rallied as much as 40% after clearing a large cup with handle at 91.22. A new base is in the works. Watch to see if ORCL stays abreast of the long-term 200-day moving average.
Oracle has focused on developing new and better products that help corporate customers utilize cloud-computing technology with the help of artificial intelligence.
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Focus On Artificial Intelligence Stocks
Since the generative AI tool ChatGPT arrived late last year, artificial intelligence has become the buzzword among companies and investors, driving many tech stocks. But some question the substance behind the fanfare.
"Is recent equity market performance just AI-generated?" one large mutual fund firm noted sarcastically in the subject line of its weekly commentary.
Any stock market forecast for the next six months should take into account the likelihood that rallies get overdone and sell-offs go too far. Certainly, market booms always carry some amount of investor hype. A recent FactSet study found that conference calls on first quarter results by S&P 500 firms showed a spike in the use of the term "AI" and a sharp decline in the use of "ESG," which stands for environmental, social and governance factors.
The bulls, however, still have good reasons to maintain a positive stock market forecast. Why? A Wall Street Journal front-page piece in the spring painted the market conditions as if it were describing a "Waiting For Godot" recession. Put another way, will the much-anticipated recession even arrive?
From that point of view, it's hard for the bears to dispute the reasons for the market's progress this year. A positive stock market forecast reflects brighter prospects for the greater economy.
"My favorite economist, Ed Yardeni, has changed his tone and is now calling the current environment a 'rolling recovery,' which is better than his previous comment that we were in a 'rolling recession,' " Louis Navellier, veteran mutual fund manager, said in a recent comment to clients.
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S&P 500 Earnings Forecasts
The S&P 500, at 4450 at the end of June, traded at 20 times the consensus earnings estimate of $220.44 this year (based on June 20 data) and 18 times the 2024 profit forecast of $246.38, according to Yardeni.com. Those figures point to a modest 1.1% increase in earnings for blue chip companies this year and an acceleration to 11.8% growth in 2024.
As of June 20, Yardeni Research saw another 11% gain in earnings to $274.44 in 2025.
Strategists like to compare the earnings yield for large-cap companies — the expected earnings divided by the S&P 500 price, multiplied by 100 — with the bond market. What do we see? At the end of the first half of 2023, an expected earnings yield for the S&P 500 of 5%, based on the 2023 profit forecast. That compares favorably with the generally accepted risk-free return of 3.76% for 10-year U.S. Treasury bonds.
Corporate profits make up a large part of the equation for future investment returns. Clearly, this stock market rally is banking on a profit turnaround that has not happened yet.
According to research from FactSet, analysts predict a 6.4% decline in earnings for S&P 500 firms in the second quarter vs. a year earlier. If the forecast is accurate, it would spell the largest drop in profits since a 31.6% plunge during the second quarter of 2020, near the onset of the Covid-19 pandemic.
S&P 500 Earnings By Sector
As of June 9, 66 of the S&P 500 companies had issued weaker-than-expected guidance on Q2 earnings. That runs below the long-term average. Another 44 S&P 500 firms have issued positive EPS guidance.
But Wall Street may be expecting some sunshine during the back half of the year. Analysts surveyed see earnings rising 0.8% in the third quarter year over year, then accelerating to an 8.2% rise in Q4.
FactSet also reported on June 9 that the price-earnings ratio for the S&P 500 is 18.5 times forward 12-month earnings. That creeps just below the 5-year average of 18.6. But it stands higher than the 10-year average of 17.3.
The reason? FactSet notes that nine of the S&P's 11 sectors likely will report year-over-year earnings growth, and five of these nine sectors could post double-digit gains. They include communication services (36.3%), utilities (26.2%), consumer discretionary (21.3%), information technology (12.4%) and financials (11.2%).
"The expected top contributors to earnings growth for the S&P 500 for Q4 2023 have all seen significant price increases since the start of the year," FactSet wrote.
Meanwhile, the near-term profit picture for energy stocks still looks dreadful. The sector could report a 24.1% fall in earnings for the fourth quarter. A 1.7% dip is expected for materials companies.
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Homebuilding's Place In The Stock Market Forecast For The Next Six Months
Good markets need good leadership. While many might think tech stocks were the main driver in exiting the 2022 bear market, one should not ignore the strength of homebuilding stocks.
The residential and commercial building stock group, one of 197 industries tracked by IBD, has jumped as much as 35% on a price-weighted basis since Jan. 1. That even beats the Nasdaq's market-leading advance.
One of the group's leaders, Meritage Homes, has bolted more than 65% since the midcap stock cleared a 97.01 buy point from a large cup-with-handle base.
Lately, MTH may be crafting a new base that shows a normal decline of just less than 21% from peak to trough. Such action no longer falls within the category of a flat base. Yet, that's still a relatively mild, and thus bullish, correction. So, watch for signals that the current base has found a bottom.
Meritage is now trying to hold a key support level, the 200-day moving average.
These stocks' strength underscores a rebound in housing starts and hints that the market in new home sales has bottomed.
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Cooling Home Prices Benefit Inflation Data, Stocks
Bill Adams, chief economist at Comerica Bank, noted that the recent data on new home sales was "mixed news for homebuilders, but good news for the inflation outlook."
Adams believes homebuilders "are moving to lower price points to keep sales going." The reasons range from more expensive financing to a decrease in materials costs. And a cooling of prices in the housing market bodes well for inflation in general. Lower inflation benefits stocks prices, for it eases pressure on the Federal Reserve to continue ratcheting up interest rates.
"New home prices don't directly go into the consumer price basket, but they do influence average shelter costs after a lag of a few quarters. So April's drop in new home prices is good news for core inflation. The median price of an existing home also fell in year-over-year terms in April, although by less — just 1.7%," Adams added.
At the end of June, IBD's Building sector ranked No. 3 among 33 sectors in terms of mid- and long-term performance. Building advanced 32.8% from Jan. 1 through June 30, the fourth best gain following Chips at No. 1 (up 43.8% year to date), Internet at No. 8 (38.1%) and Computer at No. 1 (35%). (Please go to IBD Data Tables to see the latest sector rankings within the stock tables.)
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U.S. Presidential Cycle
As is often the case in the third year of a U.S. presidential cycle, stocks have a yen for rising. However, 2022's performance and the evolution of the digital economy seem to also play a role in this year's gains.
The Nasdaq has surprised bearish traders with a rise since Jan. 1 that at one point topped 30%. The rally follows the Nasdaq's 33% drop in 2022. Bargain hunters have crowded into stocks. Lower valuations have given the stock market forecast more wind in its sails.
Indeed, the bear market of November 2021 through October 2022 removed a great deal of speculative froth from tech stocks and other premium-priced equities.
Meanwhile, the U.S. economy, which has gotten more and more digital over the past three decades, stands to continue in that direction.
Uneven 2023 Performance For Major Stock Indexes
The Dow Jones Industrial Average and the S&P 500 have clearly underperformed the Nasdaq. Poor action among bank stocks is the main albatross hanging from the necks of these two benchmarks. Two superregional lenders, SVB Financial and Signature Bank of New York, went belly-up in March because they could not handle a mass exodus of client funds.
During that March panic, the Nasdaq fell 10.5% in less than six weeks and briefly undercut its 200-day moving average.
Since then, bank stocks have continued to sharply underperform.
The exchange traded fund SPDR S&P Regional Banking, at its May 4 low, KRE cratered 41% for the year. The ETF finished Q2 at 40.83, down 7% and off 30.5% since Jan. 1. However, KRE has had a strong start to the third quarter, rallying to as high as 49.57, good for a four-month high. But it's slumped again in recent months.
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Is The 2023 Banking Crisis Over?
In addition to trends in tech stocks, investors should stay alert to banking news. Bank stocks continued to nose-dive in April and May, even though the U.S. government provided a guarantee of deposits that exceeded the federal deposit insurance limit of $250,000.
Then the Fed continued to raise the cost of money in the spring with more interest rate hikes. Banks plummeted further.
More news of shaky liquidity among lenders both big and small would severely dent the stock market forecast for the next six months.
A Sign of Banker Confidence?
Yung-Yu Ma, chief investment strategist at BMO Wealth Management, noted in recent commentary that investors still worry that regional banks may have to sell commercial real estate to remain solvent and preserve shareholder confidence. But he's seen anecdotal evidence that banking executives are buying their companies' shares.
"It could mean that those insiders feel positive about the trajectory of their business. So, overall, that's helped the rally to broaden out and small caps to do well," Ma wrote.
Yet Frank Zhao, senior director at S&P Global Market Intelligence, thinks the challenges facing certain banks have just started.
"Ominous clouds are on the horizon as banks' commercial loan portfolios come under scrutiny," Zhao wrote in a comment sent to IBD. "Vacancy rates for office buildings have hit all-time highs. For the first time in the past five (earnings) seasons, banks are prominently discussing their exposures to the commercial real estate market."
Still, this crisis hasn't stopped the U.S. from promoting a hawkish monetary policy.
U.S. financial history is riddled with waves of bank closures due to a persistent rise in lending rates and tightening business regulations. Thus, investors would do well to remember the wisdom of Jorge Agustin Nicolas Ruiz de Santayana y Borras, better known in English-language circles as George Santayana: Those who cannot remember the past are condemned to repeat it.
Stock Market Forecast: Repeat Of Stagflation 1970s?
From the early 1970s through the early 1980s, the Federal Reserve was forced to tighten the money supply in two separate campaigns to get inflation under control.
The question today: Will the Fed repeat history?
Right now, stocks have rebounded firmly on evidence that inflation is coming down, after peaking at 8% year-over-year increases at the U.S. consumer price level during the summer last year. Consumer prices rose 4% year over year in May, the smallest 12-month increase since March 2021.
But some market strategists think even just a few more moves by the Fed to raise the cost of borrowing for the nation's largest banks could lead to economic contraction and an abrupt end of the solid run in stocks.
"We believe some members of the Fed may not be willing to rest until the seemingly resilient job market weakens and (that) results in a recession," Brent Schutte, chief investment officer of Northwestern Mutual Wealth Management, wrote in comments sent to IBD.
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Concerns About Federal Reserve Rate Policy
"While wage pressures have retreated in recent months and wage expectations remain muted, the threat of a resurgence in wages that could ... (force businesses to charge) ever-higher prices appears to continue to haunt some members of the Fed. As such, we continue to believe there is risk the Fed will overshoot to the upside on rates, and the economy will slip into a shallow, mild recession," Schutte added.
Keep in mind that the fed funds rate has not yet reached the 6.5% level seen in May 2000, which led to the so-called "earnings recession" of the early 2000s. Since valuations in the stock market at the time had hit near-astronomical heights, the tighter monetary policy helped drive the Nasdaq into one of its worst bear markets.
From its then-peak of 5132 in March 2000, the composite index, loaded up with tech stocks, plunged 78% by October 2002.
More Caution On Stock Market Forecast For The Next Six Months
On Feb. 1 and March 22, the Federal Reserve continued to raise interest rates to bring down inflation. Already this year, the U.S. central bank has achieved success on that front. But on May 3, the Fed raised short-term rates by a quarter point for the third time this year. Many questions remain:
- Has the Fed already raised rates too quickly, hurting the economy for months to come?
- If the Fed keeps the fed funds rate at an elevated level for a long time, how will stocks behave?
- How much will a slower economy hurt stocks?
In a recent piece titled "Long & Variable Lags," economist Ed Yardeni of Yardeni Research pointed out this curiosity of 2023: "Tighter credit conditions after the banking crisis (seen in March) have not triggered a widespread credit crunch."
Labor Market Is A Big Factor
Yardeni offers at least two reasons. "Consumers' excess savings are dropping fast, but the economic effects are offset by retiring baby boomers' massive net worth," he wrote. Two, the strong labor market may create a lag in the effects of the Fed's purse-tightening campaign that's longer than usual, "but more muted this time."
Liz Ann Sonders, chief investment strategist at Charles Schwab, sounds a more cautious tone. She warns a collapse in the strong labor market could weigh heavily on equities.
Sonders noted on a CNBC interview that aggregate savings have come down in recent years. Therefore, a spike in unemployment could unleash a negative cycle of lower overall spending, forcing companies to cut prices. Such actions hurt earnings, causing Wall Street to lower their assumptions on price-to-earnings multiples for the stock market. That action, in turn, sends stock prices falling.
Excessive Investor Optimism?
Another risk to watch? Some observers warn that investor giddiness could get to a level that triggers a sharp pullback in stocks.
Several indicators signal rising investor sentiment. But bullishness has not reached giddy heights, a time when no more future buyers exist. That's usually when the stock market tops after a marvelous run.
Investors also should note that psychological market indicators come in and out of favor. Statistics that worked in the late 1990s and 2000s, such as the put-call volume ratio, seem to have lost their relevance today. The Cboe Market Volatility Index, or the VIX, has not pinpointed major stock market tops in recent years.
The CNN Fear & Greed Index recently hit as high as 80 a few months back, entering the zone of "Extreme Greed" on a scale of 1 to 99, has fallen sharply to the fear zone in recent days.
Individual Investors Grow More Bullish
The American Association of Individual Investors' weekly sentiment survey showed a big jump in bullishness for the week ended June 14. It rose to 45.2% vs. 29.1% on May 31. That compared with 32.1% among those polled who voted "neutral" (down slightly from the same time frame) and 22.7% (down from 36.8%) for "bearish."
Meanwhile, the June 21 Investors Intelligence survey of market newsletters saw bulls move up to 54.3%, the highest point since November 2021. The market peaked at that time, when bulls reached a danger level of 57.2%. Bears have since dwindled to 20%, the fewest since January 2022.
Ed Clissold, chief U.S. strategist at Ned Davis Research, noted that the firm's short-term NDR Daily Trading Sentiment Composite has reached its "excessive optimism zone" since June 1.
At the same time, the number of new IPOs as a percentage of NYSE stocks recently stood at 3.2%, near a five-year low. In other words, optimism among Wall Street firms is relatively low.
The Cboe VIX has plunged this year, but is still above a five-year low of 10.17 set Aug. 9, 2018, according to MarketSmith. This past week, the VIX jumped to a three-month high of 19.71.
Sentiment gauges tend to work best at market extremes. Yet sentiment gauges can remain at "overbought" levels for a long time before the demand for stocks truly evaporates and a steep decline begins.
Political Risks In Stock Market Forecast For Next Six Months
Investors also need to keep an eye on what happens in Washington, D.C.
Jeannette Lowe, Washington policy analyst at Strategas, believes the end of the student loan payment moratorium is meaningful this year. She estimates that this policy change could result in an average bump up of $380 per month in payments for each college loan borrower. This could hit spending by consumers. And it could lower the nation's gross domestic product by 0.2%-0.4% from now until the end of this year.
"We've seen lower income tax refunds this year as well," Lowe said in a note to clients. The need for fiscal austerity will fuel fierce debates on Capitol Hill in the years to come.
The late-May debt ceiling deal does not have as large a spending cut as the $2 trillion agreed during the 2011 debt ceiling battle. Yet "ultimately we believe this is only the first step in a larger trend of more fiscal austerity in the U.S.," Lowe said.
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The Pace Of The Stock Market Rally
Certainly, this year's bull market has not seen a rapid rise off the lows. Maybe this is a reason why the stock market forecast for the remainder of 2023 lacks general enthusiasm.
But Adam Turnquist, chief technical strategist at LPL Financial, says forward returns tend to be strong after indexes have reached the proverbial "20% threshold" of gains off the lows that make the switch from a bear market to a bull. And that's with or without tech stocks.
According to LPL Financial, the S&P 500 has posted average and median gains of 18% to 19% in the 12 months after the index cleared this 20% minimum rally.
Also, the S&P 500's ability to clear resistance near 4300 is a good sign for the current stock market forecast.
"It marks a major retracement level of last year's bear market and the August (2022) highs," Turnquist said in a note sent to IBD.
FOMO Buying In The Stock Market Forecast For The Next Six Months
Many feel the tech sector — the main engine of this year's rally — has become overbought. A consolidation or pullback in tech stocks could make 4300 "a challenging hurdle to clear on a sustainable basis," Turnquist added.
Yet if the move past 4300 is sustained, investors who either have a fear of missing out (FOMO) or close out short positions could help gains accelerate.
(Editor's Note: This story was originally published in late June; it will continue to get updates.)
Please follow Chung on Twitter: @saitochung and @IBD_DChung
