Strategists still aren’t bullish enough on stocks— at least not according to Fundstrat’s Head of Research Tom Lee.
Lee has been sitting on a 4,750 year-end price target for the S&P 500 and watching analysts slowly increase their calls as the S&P 500 approaches bull market territory.
“The sell-side bearishness might be the most extreme I have seen in 30 years,” Lee wrote in a note on Wednesday.
Despite several S&P 500 target boosts from prominent Wall Street analysts, Lee points out only five of the 20 analysts he’s tracking see upside from the S&P 500’s current level near 4,300. Morgan Stanley recently called for a 16% decline in earnings by the end of 2023, and investors are net short S&P 500 futures at their highest level since 2007.
So as Lee puts it, things seem “gloomy.” But there have been some signs of light amid the increasingly murky sky. The team at Goldman Sachs recently cut its likelihood of recession this year to 25%, down from 35%. The firm also believes the current artificial intelligence boom addsa material boost to earnings and therefore the S&P 500, too.
BMO Capital Markets chief investment strategist Brian Belski agrees.
“The AI hype surrounding the Tech sector is real and likely to propel future growth for many stocks within the space,” Belski wrote in a note that included a S&P 500 price target bump on Monday. “So, despite an extremely strong (year-to-date) sector performance, we believe the momentum, even if it slows a bit, is likely persist for the foreseeable future.”
Truist Co-Chief Investment Officer Keith Lerner is increasingly bullish, too. He jacked up his S&P 500 year-end “range” to 3,800-4,500 from a range of 3,400-4,300. As Lerner points out, earnings are holding up better than feared with first-quarter earnings declining less than expected and second-quarter downward revisions trending below historical averages, per Factset.
Lerner sees a “meaningful decline” below 3,800 for the S&P 500 only coming if there’s a tech sell-off. Otherwise, things may head toward the high end of his range.
“The technology sector is trading at rich valuations, and concentration at the top is a risk,” Lerner wrote in a note to clients on Wednesday. “But this is not 2000, not even close, based on valuations and returns. Although tech is extended on a short-term basis and we would be more inclined to add on pullbacks as opposed to aggressively chasing at current levels, we still see the sector as longer-term leadership.”
The history of bull markets supports Lee’s point that everyone should be expecting higher returns in the second half of 2023 if the S&P 500 can tick slightly higher and close above 4,292.44. Carson Group Chief Market Strategist Ryan Detrick points out that once stocks gain 20% off their lows — officially entering a bull market — good things happen.
Detrick tracked 13 times stocks bounced up 20% off a 52-week low. In the first thee months stocks were usually choppy, with the benchmark index actually falling 0.5% on average in the first month upon hitting bull market territory.
But in the long run, things have been overly positive. After rallying 20% from market lows, the S&P 500 averaged a 10% return over the next six months and 17.7% over the next 12 months.
“As we’ve been saying this full year, we continue to expect stocks to do well this year and the upward move is firmly in place and studies like this do little to change our opinion,” Detrick said.
