Why the Stock Market Can Go Higher, for Now

Text size Stock prices took off on Thursday morning. Here, a view from the New York Stock Exchange. Michael M. Santiago/Getty Images The market has had a great 2023 so far, but the rally may be here for a good time, not a long time. That doesn’t mean that investors can’t enjoy the ride. After an exceptionally strong January, the S&P 500 was up nearly 8% through Wednesday’s close. Tech is rallying, as is crypto, and some are hopeful that the Federal Reserve’s campaign of interest-rate increases may lose steam. In other words, investors are feeling upbeat, less risk averse, and aren’t as fearful of an economic slowdown. That isn’t entirely surprising, even to those who are concerned about future declines. As Barron’s has previously noted, there is plenty of evidence that the rally can keep going—for a while. The sky may be about to cloud over, but there is no shortage of sunshine for now. Price targets for the S&P 500 still leave more room for it to run. Stifel’s market strategist, Barry Bannister, is calling for the index to climb to 4,300 this spring, for a gain of 4.4% from Wednesday’s close as investors celebrate lower inflation, a less hawkish Fed, and little sign of recession. Oppenheimer’s Ari Wald thinks that the S&P will actually get to 4,600 in the first half of the year, marking a 12% gain from Wednesday’s close. If it gets that high, the index would be 4% below its 2022 closing high of 4796.56. Not only is the market heading higher, more stocks are pulling it upward, particularly those, like tech, that are associated with a greater willingness to take risks and more optimism about rates and the economy. Ed Yardeni, president and chief investment strategist at Yardeni Research, isn’t far behind Wald, calling for the S&P 500 to reach 4500 in the near term. He expects that the Fed may lift interest rates another three-quarters of a point to 5.25% before mid-year. While rates may not fall this year as some investors hope, the economy will remain resilient with borrowing costs at that level, he says. The bad news is that all good things must come to an end. Nor do you have to believe a big downturn is looming to see the market slipping with the temperature later this year. Stifel’s Bannister isn’t calling for a bad recession, but his earnings per share estimates for the S&P 500 are well below the consensus for the second half of the year. There are plenty of risks piling up for late 2023, ranging from the arrival of the economic slowdown expected from the Fed’s repeated rate increases to the possibility that inflation will start to take off again. That might spook the Fed and make looser monetary policy more temporary than many would like. Similarly, Wald argues that there are plenty of factors that support the S&P 500 ending the year at 4400, an increase of nearly 7% from Wednesday’s close. He doesn’t put too much stock in the so-called January barometer, but nonetheless notes that a market rise in the first month of the year was followed by more gains the rest of the year 78% of the time going back nearly a century . More specifically, he notes that strength in higher volatility cyclical names at the expense of more defensive stocks looks poised to continue. Of course, no one needs a calculator to see that if the index does close 2023 at 4400, it will have sold off a bit from his first-half target of 4600. Even Yardeni thinks that the S&P 500 will likely have to take a breather when it hits his 4500 target—despite his belief that higher potential 2024 earnings will usher in a Santa rally to carry the index to a record 4800. Even bulls might worry that the market is getting ahead of itself if we had a year of months as strong as January was. And there are plenty of factors, from signs of resilience in consumer spending to China’s reopening, that would make any slowdown a relatively mild one. So in the end, like Shakespeare’s summer, this rally’s lease of life may have all too short a date. But it will certainly be fun while it lasts. Write to Teresa Rivas at teresa.rivas@barrons.com

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