A strategist who anticipated the 2023 rally says he expects stocks to go nowhere for the rest of the year, while potentially struggling in 2024 as well, as corporate earnings growth fails to live up to Wall Street’s overly optimistic expectations.
Barry Bannister, an equity strategist at Stifel, said in a report shared with MarketWatch late Wednesday that he believes this year’s rally, spurred by relief that a U.S. recession wouldn’t arrive in 2023, has run its course.
He now expects the S&P 500 SPX to trade sideways for the rest of the year, ultimately finishing at 4,400, roughly 68 points lower from where the index closed on Wednesday, according to FactSet data. However, investors can still find opportunities as sectors that have lagged behind the market leaders.
Based on this view, Bannister sees opportunities in so-called “pair trades” like shorting Big Tech stocks, while buying financials, materials, industrials stocks and other cyclical growth stocks that have underperformed.
He also expects the equal-weighted S&P 500 index RSP to beat the traditional capitalization-weighted S&P 500 in the second half.
These trades would have already paid off over the past month. Since the start of corporate earnings season in mid-July, the equal-weighted S&P 500 has risen 2.4%, according to FactSet data, compared with 1.6% for the traditional S&P 500.
Over the same period, several members of the “Magnificent Seven” group of megacap technology stocks that Bannister is recommending as shorts have started to retreat.
Apple Inc. AAPL, -0.90% is down 6.6% at $178.19 per share, and Tesla Inc. is down 11.8% at $242 per share. Meanwhile, Nvidia Corp. NVDA, -4.72%, the stock that has benefited perhaps more than any other from the artificial-intelligence boom, has barely budged.
Investors have reason to listen, since Bannister belongs to a select group of analysts who called this year’s rebound.
At the time Bannister made his bullish call early this year, the consensus view on Wall Street, shared by analysts at JPMorgan Chase & Co. JPM, -1.34%, Morgan Stanley MS, -1.03%, Goldman Sachs Group GS, -1.60% and others, was that stocks would sink to new lows during the first half of 2023 before rebounding later in the year. Bannister opted to turn that call on its head, based on the expectation that U.S. inflation would retreat.
That view ended up being correct. Consumer prices rose by just 0.2% in June, according to CPI data, showing inflation ebbed to the slowest pace in two years and slowed more quickly than economists had expected. Investors will receive another update on the state of U.S. inflation Thursday morning.
Bannister now believes the slowdown in inflation is reaching its limit. But perhaps more important, he expects stocks could struggle in 2024 as well, as Wall Street’s lofty expectations for corporate earnings growth are ultimately disappointed.
For 2024, Bannister and Stifel expect S&P 500 aggregate earnings per share to come in at $209, little-changed from where analysts expect them to be in 2023, that is compared with Wall Street’s consensus for $226.
“…[I]f our flattish EPS view is right the S&P 500 may be flat,” he said in a note to clients.
Bannister expects earnings could struggle as a mild recession will arrive during the first quarter of 2024, while rising oil prices create a mini-price shock, helping to transform 3% inflation into a new floor, making it more difficult for the Federal Reserve to justify interest-rate cuts.
Sluggish economic growth also will hurt corporate profits, he said. Making matters worse, COVID-19 stimulus drove a surge in earnings growth in 2021 that will result in years of difficult year-over-year comparisons for companies, Bannister said.
U.S. stocks finished lower on Wednesday, extending an early-August slump. The S&P 500 lost 31.67 points, or 0.7%, to 4,467.71, while the Nasdaq Composite COMP shed 162.31 points, or 1.2%, to 13,722.02. The Dow Jones Industrial Average DJIA fell by 191.13 points, or 0.5%, to 35,123.36.