- According to Stifel, US stocks are in the middle of a bottoming process that will ultimately lead to further price gains.
- Stifel highlighted several positive catalysts ahead, including the Fed’s pause in future rate hikes.
- The investment firm expects the S&P 500 to rise 17% to 4,400 by the first quarter of 2023.
The ongoing sell-off in US stocks is nothing but the market undergoing a bottoming process that will ultimately lead to further gains soon.
That’s according to a note Wednesday from Stifel analyst Barry Bannister, who argues that there are several catalysts that could send the S&P 500 up 17% from current levels to 4,400 by the first quarter of 2023.
“This is only possible if the Fed gradually becomes more restrictive [in] In November and December we see another rise in the 10-year TIPS yield, so we believe the price-to-earnings ratio has bottomed,” he said, adding that he expects lower inflation readings going forward.
“Both PCE and CPI inflation are decelerating/overshooting and inflation indicators are pointing down, so the question is whether the process is fast enough for the Fed,” Bannister said.
Although August’s 8.3% CPI inflation report came out hotter than expected and prompted a massive sell-off in stock markets, it actually represented a slowdown from July’s 8.5% rise and 9.1% pace in the month June.
Lower inflation readings should give the Federal Reserve confidence to pause rate hikes as Bannister says it’s becoming more data dependent at each FOMC meeting, and this shift could send stock prices sharply higher.
But what matters perhaps most to the direction of the S&P 500 is whether or not the economy enters a recession, and it doesn’t see that until the third quarter of 2023. That means there’s a sizable month-long trading window now through at least Provide stock market gains at the end of the first quarter.
And this trading window aligns perfectly with favorable seasonal stock market data.
“Almost all returns in the S&P 500 occur [from] From November 1st to April 30th of the next year. Aren’t you fighting seasonality?” Bannister said. “Fed policy plus negative S&P 500 seasonality (May to October) are headwinds that should ease from November 2022 to April 2023.”
And by November, there could be significant clarity on several concerns that are worrying investors, including the Russia-Ukraine war, better winter forecasts that would bode well for Europe’s energy crisis, and a fix for the US midterm elections, among others for reference.
To position for a potential market recovery into early next year, Bannister recommends investors own large technology stocks and cyclical value stocks found in the retail, homebuilders and banks sectors.
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