In the second half of 2022, Stifel's chief equity strategist Barry Bannister lifted his target for the S&P 500 index by 200 points to 4,400, expecting cyclical growth stocks to lead the way higher in a relief rally. In a note dated Aug. 4, Bannister pointed out that the industry continues to favor cyclical growth, pointing out the software, media, tech hardware, retail and semiconductor industries. The five cyclical growth industry groups we see rallying are dominated by large technology-related stocks. S&P 500 SPX, which tracks U.S. large-cap stocks, was trading down at 4,132 at the last check, according to FactSet data. Stifel's revised target implies that the index could gain more than 6% by the end of the year.
Bannister raised his price target for the US stock market as bets on 36 month Fed funds futures appear to have peaked and the equity risk premium for the S&P 500 now indicates 4,400 as a mid-point price target, according to the note.
The Federal ReserveFederal Reserve has been aggressively hiking its benchmark interest rate in an effort to tame the highest inflation in decades. Inflation, and in turn, Fed hawkishness, have peaked, investors have been trying to assess.
Inflation is likely to decline sharply in a highly unusual non-recession slowdown influenced by COVID policy, according to Bannister in his note. He believes that cyclical growth stocks will see a rally as inflation slows, Fed expectations are pulled back, and the economy has the balance sheet and momentum in 2022 to mitigate recession risk. In late June, Bannister predicted that cyclical growth would lead to a 10% relief rally for the S&P 500 this summer. The U.S stock market surged last month, with the S&P 500 and Dow Jones Industrial Average each booking their biggest monthly gains since November 2020, while the tech-heavy Nasdaq Composite scored its best July ever.
Cyclical growth could lead to a 10% relief rally for the S&P 500 this summer, says Barry Bannister, Stifel spokesman.
FactSet data shows that the S&P 500 is up around 9% in the third quarter. The benchmark fell 20.6% in the first half of 2022, sinking as investors fretted about rising interest rates hurting the valuation of stocks.
The stock-market selloff seen in the first half of 2022 is still being reversed, said Bannister. He said that the rally requires the US financial conditions not to tighten, while oil shocks from the Russia-Ukraine war are also a risk to his new S&P 500 target.
The potential peak of 36 month Fed rate futures puts in a top for the real yield of 10 year Treasury Inflation-Protected Securities, which is usually bullish for the S&P 500's price-to- earnings ratio. According to his note, the equity risk premium, the earnings yield minus the 10 year TIPS real yield, may drop to 3% to 3.5%, which is bullish for the index.
U.S. stocks were trading lower Friday after a stronger than expected July jobs report spurred fears that the Fed may need to raise its benchmark interest rate to bring down inflation. The Dow Jones Industrial Average DJIA was down 0.1%, while the S&P 500 was off 0.5% and the Nasdaq Composite COMP, at last check, fell 0.8%, according to FactSet data.
The Dow was on pace for a 1.8% gain for the week, while the S&P 500 was flat and the Nasdaq was on pace to decline 0.5%.