From Relief to Restraint: Analyzing the Transition as Stock Markets Stabilize

The substantial growth in the stock market observed in the early portion of the year has now concluded. Investors should prepare themselves for reasonable returns from this point up until the end of 2023.

Barry Bannister, the chief equity strategist at Stifel, alerted clients in a message on Thursday that the economic rally witnessed during non-recessionary times has ended. He additionally warned that there’s still a chance of a recession affecting the US economy in the initial quarter of 2024.

Bannister claimed that the repercussions of past policy limitations, ongoing surveillance by the Federal Reserve, the potential for a slight oil crisis, and the impending total utilization of economic resources all contribute to the likelihood of a conventional, but not harsh, U.S. recession at the onset of 2024.

Bannister’s viewpoint largely depends on the commitment of the Federal Reserve to lessen inflation to its long-term target of 2%, even though it’s currently approaching 3%.

Bannister expressed that the previous ceiling for inflation has now turned into the base level of inflation. He suggested that considerable work and strategy would be necessary to reduce the inflation rate from about 3% to close to 2%.

The Consumer Price Index (CPI) report for July likely reinforced Bannister’s viewpoint, as it disclosed a 0.2% monthly price escalation and an approximate 3.2% annual increment over the last year. These increases are more significant than the 3.0% recorded in June.

Since the start of the year, the S&P 500 has seen an increase of around 17% but has experienced a decrease of about 3% since the onset of August. Bannister forecasts that the S&P 500 will close the year at 4,400, suggesting a likely fall of close to 2% from its current levels.

Bannister anticipates that the stock market will remain fairly stable from now until the end of the year, a trend that seasonality data suggests would not be uncommon.

Information from the Bank of America shows that during the third year of the Presidential Cycle, the stock market yields are typically lower from July to December. The Presidential Cycle is a four-year period in the stock market that corresponds with the tenure of the US President.

Stephen Suttmeier from BofA issued a comment on Tuesday, highlighting the ongoing period of lower activity for the S&P 500 within the Presidential Cycle. He explained that average and middle monthly returns indicate the S&P 500 generally performs well from January to July during the third year, but it typically faces underwhelming performance from August to November. Nevertheless, it often recovers with a surge in December.

Bannister’s perspective on the stock market nearing 2024 doesn’t seem too optimistic, given his existing projections on earnings. His forecast of the S&P 500 is to register earnings per share at $205 in 2023 and just a slight increment to $209 per share in 2024. This is notably lower than the widespread forecast of the S&P 500 yielding $226 earnings per share in the next year.

“Bannister asserted that if our forecast of a relatively steady Earnings Per Share proves to be accurate, then the S&P 500 could possibly remain stable as well.”