After a period of ups and downs, the stock market is expected to show a slightly positive trend in the next six months. Many technology companies, including Microsoft, Oracle, and Palantir Technologies, have seen significant increases in their stock prices, which has excited investors.
There is a feeling that investor confidence is returning. Besides the tech sector, consumer growth companies like Celsius, the maker of energy drinks, have also made strong progress, providing a positive influence on the overall market.
However, this positive outlook could change if there are negative developments in corporate earnings, interest rates, or the stability of the banking industry. Moreover, there are risks beyond the United States, such as potential diplomatic or military events like the Ukraine-Russia war, which could dampen investor sentiment.
The Federal Reserve is expected to continue increasing interest rates in order to control inflation. Therefore, interest rates will remain an important factor for investors to consider.
Despite these factors, experienced market experts anticipate some modest gains in stock prices in the near future.
S&P 500 Forecast: A Mixed Bag of Expectations
On Friday, the S&P 500, a stock market index, experienced a decline after a five-week period of growth. However, even at its lowest point of 4343, it had already exceeded the predictions of many financial firms on Wall Street, who had expected it to reach only 4200 to 4300 by the end of the year.
BCA Research, in a report titled “So Far, So Good On The Road To 4500,” feels that their earlier forecast of the stock index approaching 4500 has been proven correct. However, their optimism for the second half of the year is somewhat restrained.
The research firm stated on June 18 that they continue to recommend holding a higher proportion of equities in investment portfolios but are preparing to reduce this overweight position once the S&P 500 reaches 4500. They believe that while the index may surpass their target, the rally is unlikely to continue beyond the summer.
One reason for their caution is that BCA expects the predictions made by Wall Street for stock performance to become overly optimistic, leading to negative surprises in corporate earnings. Additionally, they predict that an economic recession will occur in the first half of 2024.
How Inflation Is Affecting Corporate Earnings?
Some experts who are particularly pessimistic about the stock market’s future have given their predictions for the next six months. One of them is Mike Wilson, the chief U.S. equity strategist at Morgan Stanley. According to the Wall Street Journal, as of June 5, he forecasted that the S&P 500 would decline to 3900 by the end of the year. He based this on his belief that corporate earnings for S&P 500 companies could decrease by 16% this year, resulting in a total of $185 per share. In contrast, the FactSet consensus predicts a growth of nearly 2%.
If we apply a price-to-earnings ratio of 20 times Wilson’s earnings estimate, it indicates a gloomy target of 3700 by the end of December. This means that the S&P 500 would need to drop more than 15% from its current level. Such a decline would be considered a moderate correction.
The outlook is heavily influenced by inflation and interest rates. In its recent meeting on June 13–14, the Federal Reserve decided not to raise the fed funds rate, which currently ranges from 5% to 5.25%. However, other central banks in Canada, Australia, and the European Central Bank have opted for rate hikes. Fed chief Jerome Powell indicated in his testimony to Congress that further tightening of monetary policy is expected in the United States.
According to CME FedWatch, there is a nearly 75% chance that the Fed will increase rates by another quarter-point at its meeting on July 25–26.
Furthermore, recent inflation figures from the United Kingdom showed a higher-than-expected 8.7% year-over-year increase in consumer prices for May. On a monthly basis, inflation rose by 0.6%. These figures suggest that monetary tightening measures may continue across the globe. This is seen as negative news for the stock market forecast.
What to Expect from the Stock Market in 2023?
The U.S. stock market has seen impressive gains in the first half of 2023, surpassing the entire year’s gains in some previous years. This, however, also increases the risk of a potential decline in prices.
By mid-June, the rise of the S&P 500 had reached almost 16%. This was higher than the gains seen in the full years of 2010, 2011, 2014, 2015, and 2016. In those years, the market had experienced more modest increases or even slight declines.
It’s important to note that these gains have been concentrated in specific stocks. For example, Palantir, a company specializing in AI-driven data analytics for government and private sectors, saw its stock price surge by as much as 167% since the beginning of the year, although it has recently pulled back around 14%.
Among other notable tech stocks, Microsoft has attracted significant attention and investor interest due to its advancements in artificial intelligence-related products, services, and platforms. The tech giant’s stock has rallied by as much as 46% in 2023 and has climbed 165% since its low point during the pandemic bear market in 2020.
The S&P 500: What You’re Not Being Told
However, if we exclude the influence of these large tech stocks, the Invesco S&P 500 Equal Weight (RSP) exchange-traded fund tells a different story. Although it reached a peak of up to 10% in gains on February 2 this year, those gains have since diminished to less than 3%.
In contrast to the stock market, the year 2023 has not been favorable for commodities. Unlike in 2021, when oil, gas, and metal mining stocks contributed to the rise in equity indexes, this trend is not observed currently. This has implications for the overall progress of the stock market.
The price of West Texas Intermediate crude oil futures remains in a bear market, indicating a decline in oil prices. Gold futures, which dropped to $1,919 per ounce on Friday, have only gained 5% since the beginning of the year, which may have disappointed traders. Copper, with a modest 2% increase for the year, has fallen more than 23% from its peak of $4.93 per pound on March 4, 2022.
Where Will the S&P 500 Be in 6 Months?
For investors who are willing to take risks and choose individual stocks, the stock market forecast for the remainder of 2023 is looking very positive. In fact, it’s quite bullish.
Consider the impressive performance of the IBD 50 list, which comprises the top growth stocks. The median gain for these stocks this year, as of Thursday, is a remarkable 48%. Several companies within this list, such as Axcelis Technologies, DraftKings, Samsara, and Symbotic, have surged by 100% or even more.
Even some well-established tech companies from the dot-com bubble era have regained their momentum. Oracle, for instance, has experienced a rally of up to 40% after successfully surpassing a significant price threshold.
Oracle has been focusing on developing innovative products that assist businesses in harnessing the power of cloud computing technology, augmented by artificial intelligence.
This demonstrates that there are exciting opportunities in the market, particularly for those who are willing to carefully select stocks with strong growth potential and stay ahead of emerging trends in the tech sector.
Are you ready to invest in the future of AI?
Artificial intelligence has become a popular topic among companies and investors, driving the growth of many tech stocks since the introduction of the generative AI tool, ChatGPT, last year. However, some people question if there is substance behind all the excitement.
It’s important to consider that stock market forecasts for the next six months should take into account the possibility of exaggerated rallies and excessive sell-offs. Market booms always come with a certain level of hype from investors. A recent study by FactSet found that S&P 500 firms mentioned “AI” more frequently in their conference calls discussing first-quarter results, while the mention of “ESG” (environmental, social, and governance factors) declined sharply.
Nevertheless, the bulls, or those with a positive outlook, have valid reasons to maintain a favorable stock market forecast. A Wall Street Journal article compared the current market conditions to the play “Waiting for Godot,” suggesting that the anticipated recession may not even materialize.
Considering this perspective, it’s difficult for the bears, or those with a negative outlook, to dispute the reasons behind the market’s progress this year. A positive stock market forecast reflects brighter prospects for the overall economy.
Louis Navellier, an experienced mutual fund manager, shared his thoughts with clients, mentioning that renowned economist Ed Yardeni now refers to the current situation as a “rolling recovery” instead of a “rolling recession.” This change in tone further supports a positive outlook for the market.
Will the S&P 500 earnings beat expectations in 2023?
The S&P 500 is currently trading around 4350 and is valued at 19.7 times the estimated earnings for this year and 17.7 times the projected earnings for 2024. This suggests a modest 1.1% increase in earnings for blue-chip companies in 2023 and a stronger growth of 11.8% in 2024, according to Yardeni.com. Yardeni Research further expects an 11% increase in earnings to $274.44 in 2025.
Experts often compare the earnings yield of large-cap companies, which is the expected earnings divided by the S&P 500 price multiplied by 100, with the bond market. Based on the 2023 profit forecast, the expected earnings yield for the S&P 500 is 5%. This is favorable when compared to the risk-free return of 3.79% for 10-year U.S. Treasury bonds.
Corporate profits play a significant role in determining future investment returns. The current stock market rally is banking on a turnaround in profits that has yet to occur.
According to research from FactSet, analysts predict a 6.4% decline in earnings for S&P 500 companies in the second quarter compared to the same period last year. If this forecast proves accurate, it would be the largest drop in profits since the significant decline of 31.6% during the second quarter of 2020, near the beginning of the Covid-19 pandemic.
Which sectors are expected to drive S&P 500 earnings growth in 2023?
As of June 9, 66 companies in the S&P 500 have provided guidance for weaker-than-expected earnings in the second quarter. However, this number is below the long-term average. On the other hand, 44 S&P 500 companies have given positive guidance for their earnings.
Despite this, Wall Street analysts anticipate an improvement in the latter part of the year. They foresee a 0.8% increase in earnings for the third quarter compared to the same period last year, followed by a more significant 8.2% rise in the fourth quarter.
According to FactSet, the price-earnings ratio for the S&P 500 stands at 18.5 times the earnings projected for the next 12 months. This is slightly below the five-year average of 18.6 but higher than the 10-year average of 17.3.
The reason for the relatively higher ratio is that nine out of the S&P’s 11 sectors are expected to report year-over-year earnings growth. Among these sectors, communication services, utilities, consumer discretionary, information technology, and financials could even achieve double-digit gains in earnings.
FactSet highlights that the companies expected to contribute the most to earnings growth in the fourth quarter have seen significant price increases since the beginning of the year.
However, the short-term outlook for energy stocks remains bleak, with a projected 24.1% decline in earnings for the fourth quarter. Materials companies are also expected to experience a slight dip of 1.7% in earnings.
In conclusion, the stock market is expected to experience some turbulence in the next six months. While there are positive signs, such as the strong performance of technology companies and consumer growth companies, there are also risks that could impact the market, including corporate earnings, interest rates, and global events. The Federal Reserve’s decision to raise interest rates and the potential for inflation to affect corporate earnings are important factors to consider. Despite these challenges, market experts anticipate modest gains in stock prices. However, certain sectors, such as energy and materials, may face difficulties in the short term. Overall, it’s important for investors to stay cautious and informed about the changing market conditions.