S&P 500: Don't just 'chase the momentum,' strategist says

Multiple financial firms have raised their target goals for the S&P 500 (^GSPC) with Evercore ISI going as far as raising their target from 4,750 to a record-breaking 6,000.

Roth MKM Partners Chief Economist and Macro Strategist Michael Darda joins Market Domination to give insight into the bullish sentiments behind the S&P 500 and what investors need to keep in mind.

When asked about the implications of these new year-end targets, Dard states: "We have to be very careful about just chasing the momentum here. There's an old Bob Farrell quote that parabolically rising markets 'do not correct by going sideways.' And so it's very unlikely when you're in a frenzy like this with a lot of chasing, that it just simply peters out and levels off. And so my advice would be not to get involved in a chase, not to be using leverage. And then really just the basics, diversify. Maybe look at some areas that have been laggards all within the context of putting together a multi-year portfolio."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video Transcript

There are several big tech names helping drive the rally for more on the latest moves.

We now welcome in Michael Darer Roth MKM, partners, chief economist and Macro strategist, Mike.

It is always good to see you.

So let's start here, Mike.

So Goldman raises his 20 24 target for the S and P 500 to 5600 Citigroup does the same Evercore.

Mike goes to 6000.

So maybe start there, Mike.

You know, how are you feeling about this mark?

Are you feeling as optimistic as some of your colleagues, Mike?

Well, thanks for having me on.

Always my pleasure.

Uh No, I am definitely not feeling as optimistic as uh some of my competitors out there.

Uh But look um credit to where credit is due if you've been bullish and you've just been following the trends and you've been following the momentum, that's been the right play this year and it was the right play last year.

So I think what's happening here is this, this market just taking off and now the chase is on.

Uh and folks are just going with the trend and extrapolating that out into the future.

And you know, that's a double edged sword because if the trend doesn't change, then, you know, you'll be right.

But if it does, then you know, that's like walking straight off a cliff.

So I am, I am not optimistic.

I mean, it's gonna be difficult to time, but when valuations get this stretched and the leadership is this narrow, uh I think we are set up for pretty weak future returns.

Uh But you know, the timing is a real challenge.

Hey, Mike, it's Julie here.

So even if it's going to be difficult to time, maybe you could give us an idea of what the contenders are for being that catalyst though because things usually don't just change just because valuations get stretched.

For example, usually there's some kind of trigger.

What are your candidates for that trigger?

Yeah, great question.

I, I think we have two dominant themes right now.

One is obviously the A I frenzy and so there is a tremendous amount of optimism that A I is going to bring tremendous broad-based benefits.

And so that's why the valuations are are going up.

Um You know, we have the Infotech index within the S and P 500 at a 34 multiple.

So that's even a little bit above where we were in late 21 early 22 when valuations got really high.

And then we had a more than 30% downdraft in, in the sector in 2022.

Now, the causes were a bit different people, you know, were worried that we might be going into recession, we had rapid inflation, rapid rate hikes.

So this time around, I think something has to interrupt the story in terms of A I delivering all these benefits and that's going to take time to play out.

Right now.

The expectations are quite high and the higher they go, you know, I think the bigger the risk is that we ultimately end up a bit disappointed about what's in front of us.

The other dominant theme in addition to the A I frenzy and a lot of enthusiasm, there is the soft landing story which has been playing out, um, fears that, you know, the economy wouldn't make it through last year without a recession and we made it through.

Uh, and then some and, you know, payroll growth has stayed quite strong even though the, the Fed did all of these rate hikes the most rapid, you know, tightening campaign in four decades and the economy is held in there.

And so the soft landing, you know, we've essentially been in a soft landing since the Fed stopped raising rates last summer.

And so, so that theme has not been interrupted yet.

And there's a, you know, there's a lot of enthusiasm over the fact that the Fed likely will cut rates, that will be the next move.

And I think the assumption is that any rate cuts at any time for any reason will simply be bullish.

And I would challenge uh those assumptions, all three of them.

Typically, when the is cutting rates, things are going wrong with the business cycle.

And we don't have to look back that far to see markets peaking and starting to roll over just as the fed is starting to ease.

That actually happened going into the 0709 recession, one of the longest and worst in history, one of the most significant bear market.

So I think the idea that any rate cuts for any reason at any time is simply bullish.

I think we're on, you know, pretty flimsy ground with that assumption.

So, so Mike, so given that sort of that broader view, you've got, that's your backdrop for, for equity investors who are listening right now.

What, what are the investment implications of that, Mike?

Well, I think the implications are we have to be very careful about just chasing the momentum here.

Um You know, there's an old Bob Farrell quote that parabolic rising markets do not correct by going sideways.

And so it's very unlikely when you're in a frenzy like this with a lot of chasing uh that it just simply, you know, Peters out and levels off.

And so I my, you know, my advice would be not to get involved in a chase, not to be using leverage and then, you know, really just the basics uh diversify, maybe look at some areas that have been laggards all within the context of putting together a multiyear portfolio.

I mean, most of your viewers are probably not day traders.

I don't have any advice to anyone day trading.

Uh So if you're investing, it really should be a multiyear horizon.

And within that context, I would look at some of the areas that are lagging behind value stocks, maybe down the capitalization structure.

We have a rare moment in history uh where the Russell, the small cap stocks are at a lower forward valuation than the S and P 500 which has been dominated by these big, big tech players.

So, you know, that's not a call for the next week or the next month.

But I think over a multiyear horizon with the individual investor should be doing is diversifying, not chasing momentum and maybe looking at some of the laggards as a contrary play.