The S&P 500 has entered a new bull market, but experts are unsure if the rally can last.
AI hype and robust US corporate earnings have fueled the 2023 rally.
But experts warn that the US is on the verge of slipping into a recession.
The S&P 500 is up more than 20% since its October low, a technical signal that it's officially in a new bull market — but Wall Street remains divided on whether the current rally is truly the start of a new bull market or not head fake before stocks inevitably crash again.
The benchmark index was largely boosted by the rally in mega-cap tech stocks thanks to Wall Street's enthusiasm for artificial intelligence. Analysts believe that AI could increase productivity and profits and boost stock prices in the years to come. For the time being, they are ignoring fears that a dot-com bubble is forming in the industry.
Experts remain concerned about a looming recession, with alarm being sounded by all sorts of economic indicators, from falling carton demand to falling RV sales. According to the latest projections from the New York Fed, the US now has a 70% chance of slipping into recession by May 2024 – an event that could easily derail the rally in equities.
Here's what Wall Street commentators are saying about whether the current stock rally still has room to play.
David Rosenberg, founder of Rosenberg Research
The rise in stocks is unsupported by fundamentals and will not last long as the US is virtually guaranteed to fall into recession this year, according to top economist David Rosenberg.
That's because the S&P 500's strong performance this year has been at odds with economic data, Rosenberg said. Jobless claims rose another 1,000 to 262,000 last week, remaining at their highest level since October 2021.
Meanwhile, rising interest rates over the past year are tightening financial conditions and making a recession more likely. And although central bankers kept interest rates stable at their monetary policy meeting on Wednesday, officials hinted that further rate hikes could be on the cards later this year as inflation remains a threat.
“This market continues to be nothing more than a short-term momentum play,” Rosenberg said in a recent statement. “You can believe the headlines in the press or the leading indicators – which suggest that we actually have a 99.15 percent chance of an officially NBER-defined recession,” he said.
Jeremy Siegel, economist and professor of finance at the Wharton School
According to top economist Jeremy Siegel, investors can expect the stock rally to come to an end as the US enters a mild recession this year.
Siegel has been a vocal critic of Fed policy over the past year, urging central bankers to scale back rate hikes to avoid a recession.
Despite previously forecasting a 15% rise for the S&P 500, he has become more bearish on the market as the likelihood of a recession increases. He predicted stocks are likely to slide as the US heads into a shallow recession this year, although stocks are unlikely to retrace the lows hit last October.
“This recent bull market move is no guarantee that we have weathered the downturn,” Siegel said in his weekly commentary for WisdomTree on Monday. “I remain cautious and don't think we have the start of a big move higher here,” he added.
Mike Wilson, CIO of Morgan Stanley and chief equity strategist
The current stock rally is a fluke and the bear market is still alive. Importantly, corporate earnings will fall later this year, prompting a sell-off according to Mike Wilson, top equity strategist at Morgan Stanley.
Wilson has been warning of a sharp earnings recession for months. He predicted that companies would still struggle with inflationary pressures and tighter financing conditions, which could lead to a profit decline of up to 16%.
“While we believe AI is real and likely to lead to significant efficiencies that will help fight inflation, it is unlikely to prevent the earnings recession we forecast for this year,” Wilson said in a recent statement.
Tom Lee, Fundstrat Research Director
Fundstrat's Tom Lee, one of the first to call out the bull market in equities, believes the rally has room for expansion beyond the technology sector.
In Lee's view, the economy is indeed on the brink of expansion, not recession. Inflation is showing signs of slowing down and companies are indeed poised for a profit boom.
“Rather than a recession unfolding, it looks like the economy is slipping into expansion,” he said in a recent interview with CNBC. “I don't think the stocks will expand.” I think the FAANGS did the hard work and I think if we go into expansion, a lot of other groups will get involved,” he later added.
The hype about AI is real and could see the S&P 500 rally higher this year, Goldman Sachs said.
The investment bank pointed to the potential benefits of AI, as companies that adopt the technology could see an increase in productivity and therefore an increase in profits. That could send the S&P 500 up as much as 14% in the coming years, strategists say.
And while AI enthusiasm has primarily fueled tech stocks, the rally could spill over into other sectors, as previous episodes of constrained market breadth have meant the percentage of winning stocks in the S&P 500 as a whole has increased.
The bank has also lowered its estimate that the economy will be hit by a recession this year to 25%, compared to the 35% probability it had predicted earlier in the year.
The S&P 500 could end the year at 4,500, strategists forecast, up about 5% from current levels and up about 17% for the full year.
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