• First, we are lifting our YE 2023 S&P 500 price target from 4,100 to 4,250, which represents our base case. The range of outcomes in our modeling spans ~3,800 (our bear case) to ~4,600 (our bull case).
€¢ Second, we are lifting our:
If you’d like to hear more, here’s another six minutes.
While you’re waiting, a quick reminder that if you’ve found our work helpful, we’d appreciate your vote in the Institutional Investor All America Research Survey in the Portfolio Strategy category. Voting is open now and expected to remain open through June 23rd.
Now, the details.
: we are lifting our YE:
• Our target is roughly the average of six different economic, sentiment, valuation/earnings, political, and cross asset models that we employ.
urrent consensus forecast for:
• Our cross asset models bake in the greater appeal of bonds relative to equities by examining how stocks perform when the dividend yield and earnings yield appeal of US equities has turned low relative to 10-year Treasuries.
• Those models argue that the S&P 500 deserves to end the year in the 4,000-4,100 area for low single digit annual gains.
• Our sentiment, political, and valuation tests are most constructive and suggest the S&P 500 could end the year much higher in the 4,400-4,600 range. They capture a few different ideas…
o One of these is that that the stock market usually does very well in 3rd years of a presidential cycle, rising more than 16% on average…
o Another is that US equity market returns tend to be powerful when investor bearishness is as deep as it was to start the year and became again after the regional banking crisis. More specifically, when AAII net bullishness is at -10% in favor of the bears or more (as it was to start the year and still is today) the S&P 500 typically rallies 15% over the next 12 months.
o Other metrics also point to peak fear having been seen among institutions. These include the MOVE index, which measures bond market volatility and hit LTCM highs earlier this year…
o and CFTC data on leveraged funds net short positioning in S&P 500 e minis, which has been near historical lows.
EPS forecast for:
• Looking beyond these models, our work points to other reasons to temper both optimism and pessimism. Those are too numerous to highlight in this podcast, even considering we’re breaking it up into two parts. So we’ll highlight two of our favorite charts – one bullish and one bearish.
o On the constructive side, one of the newer, more eye catching charts we’ve published addresses the question of what tighter lending standards mean for the stock market. We were surprised to find that since the GFC, the S&P 500 has actually tended to bottom before the peak in C&I lending standards.
in the concept of recovery in:
: we are lifting our:
• On our 2023 number of $213 –
in the final two quarters of:
o We are a still a little below the sell-side bottom-up consensus of $220 – but we wouldn’t over think this. Generally, we’re feeling better about the earnings backdrop. The rate of upward EPS estimate revisions for the S&P 500 has turned positive again…
o bottom-up estimates tend to reflect reality by mid-year based on our study that looks at all earnings
downgrade years going back to:
o stock price were already baking in a very onerous earnings backdrop last year.
• On our:
• real GDP and industrial production will recover in the back half of the year, Fed cuts will occur, and 10-year yields will drift a bit lower. Again, this is all what the consensus economic forecast is projecting and our earnings forecast will continue to be revised as those projections evolve.
That’s all for now. Stay tuned for part 2 of our outlook update in podcast form – where we’ll run through our thoughts on positioning including the Large Cap Growth trade and Small Caps. Thanks for listening, and be sure to reach out to your RBC representative with any questions.
