According to a list of S&P 500 targets for 2023 compiled by Sam Ro at Tker, Wall Street's median target saw stocks trading roughly flat a year ago. For 2024, the median strategist call projects the benchmark closing at 4,775, or up about 4% from when the list was compiled on Dec. 1.
That's even as the same challenges — a possible recession, further uncertainty on the Fed's rate path, and concerns over the lagging impact of tighter financial conditions — linger.
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Bank of America's Savita Subramanian, who initially projected stocks to trade flat in 2023, sees the S&P 500 reaching 5,000 next year.She explained the positive sentiment stems from investors having seen "proof of concept" throughout 2023.
"We've had a year of surviving higher interest rates," Subramanian told Yahoo Finance during a media roundtable in late November. "And we haven't seen things come to a screeching halt."
There are still plenty of bear calls, notably from the equity strategy team at JPMorgan, who projects the S&P 500 to close 2024 at 4,200. When — and how quickly — the Federal Reserve will bring interest rates down is a big factor.
"Absent rapid Fed easing, we expect a more challenging macro backdrop for stocks next year with softening consumer trends at a time when investor positioning and sentiment have mostly reversed," JPMorgan equity strategists led by Dubravko Lakos-Bujas wrote in the team's 2024 outlook. "Equities are now richly valued with volatility near the historical low, while geopolitical and political risks remain elevated."
To the bulls, that call is falling on tired ears.
"The big story here from what we can see is it just looks like the US economy is bigger than the negative pitchbook of the bears," Oppenheimer chief markets strategist John Stoltzfus told Yahoo Finance in a nod to economic data that has surprised to the upside throughout 2023. "They were looking for a recession. They were looking for a huge drop in jobs. They were looking for big earnings to fall of the table. Well it didn't happen."
The 'Chicken Little' recession
A common thread among strategists projecting the S&P 500 will breach at least 5,000 next year is that the recession many had projected either won't come at all or has been so discussed at this point it might not really matter.
Brian Belski at BMO calls it the "Chicken Little recession," a reference to the fictional character who insists the sky is fallingand causes mass hysteria over it. Belski thinks if there is a downturn next year it will be a "recession in name only."
"We will continue to take our cue from labor market trends, and unless they take a sharp turn for the worse, we are simply not concerned about the recession debate at this point," Belski wrote in his 2024 outlook.
The team at Deutsche Bank is still in the recession camp. They see economic growth slowing and "a mild recession" in the first half of the year. But to the firm's chief US equity strategist Binky Chadha, the risks of recession would only lead to a "modest short-lived selloff."
Chadha says his team is long "what everybody hates." They see opportunity in banks and cyclical consumer stocks as both have already been priced for recession. With a slowdown already reflected in prices, those stocks would sell off less if a recession hits, or "soar" if the economy fully rebounds.
Earnings rebound
The enthusiasm from Wall Street bulls is also anchored in earnings growth that has surprised to the upside. In the most recent quarter, analysts expected earnings to increasejust 0.4% compared the same period a year prior. Instead, earnings rose 4.7%, per FactSet data.
"The fact 8 of 11 sectors are showing positive earnings growth, with four of them — Communications Services, Information Technology, Consumer Discretionary, and Financials — rising double digits. That's a wake-up call," Stoltzfus said. "This is remarkable."
And what's happening within those sectors is perhaps even more eye-popping to Subramanian at BofA. For instance, she points to Meta (META), one of the Magnificent Seven tech stocks that led the 2023 market rally. The company declared 2023 the "year of efficiency."
In the most recent quarter, Meta's expenses fell 7% compared to last year. The company's operating margin increased from 20% a year ago to 40% this year. The stock has followed suit, gaining about 170% this year.
"We saw these companies [in Communication Services] admit that they had grown too quickly, that they needed to cut costs, they needed to fire people, consolidate capacity," Subramanian told Yahoo Finance. "And they did so very quickly and nimbly. And they also focused less on growth, and more on cash return."
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Importantly, the rally didn't reward all equities.
Some smaller stocks in the S&P 500 that struggled amid the higher interest rate environment were removed as a part of the index's rebalancing, effectively mitigating interest rate risk in the major average, per Subramanian.
"A lot of attrition over the last couple of years since the Fed started hiking interest rates has effectively cleaned up some of the debt risk in the S&P 500," Subramanian said. "So companies that had a lot of refinancing risk, and were born in an era of zero interest rates, and probably couldn't hack it in today's era of 5% rates, migrated lower in market cap [and out of the S&P 500]."
So after a year that was supposed to be a win for the bears, stocks are touching fresh 2023 highs, inflation is cooling faster than many initially projected, and the discussion around the Fed has shifted from when the hikes will stop to when cuts begin as the bulls are barreling forward with momentum on their side.
"The idea of just kind of hitting a massive recession ... geopolitical shocks derailing the global economy, I think a lot of those risks are behind us rather than ahead of us," Subramanian said. "That makes me feel a lot more sanguine."
