Stocks closed lower on Wednesday, marking a third-straight session of losses for the S&P 500 (^GSPC) and underscoring the seasonal trend of market declines in September.
But one of Wall Street’s most prominent bulls thinks the S&P could gain another 13% this year.
“Yes, there is still a fair amount of uncertainty to be resolved in the coming months that will likely lead to shorter periods of heightened volatility, but we continue to believe that higher US stock prices through year-end is the path of least resistance with our bull case scenario (5,050) becoming increasingly more likely,” BMO Capital Markets Chief Investment Strategist Brian Belski wrote on Tuesday night.
Historical trends point to future gains
Belski notes that historically stocks have produced gains 71.4% of the time in the six months following a 20% run-up like the S&P 500 saw to start 2023, meaning September seasonality may not be at play.
He isn’t the only one who has voiced the sentiment. Carson Group chief market strategist Ryan Detrick told Yahoo Finance that when stocks are up more than 10% year-to-date, September seasonality usually isn’t as bad. Fundstrat head of research Tom Lee recently called for a gain in the benchmark average this September.
“We believe consensus caution of September will prove to be unwarranted,” Lee wrote in a note on Friday. “In fact, we believe September probabilities favor a gain of 2% to 3%, supported by a downward shift in consensus views around inflation and inflation risks.”
High yields don’t imply doom and gloom
Seasonality aside, Belski and BMO’s call comes as stronger-than-expected economic data throughout the summer has some economists fearing upside risks to inflation. Rates tied to the 10-year Treasury note are at their highest levels since the Great Recession (rising yields can be seen sign of shrinking investor confidence). And Wall Street bears are still wary that the lagging impacts of monetary policy will slow economic growth, whether or not the Federal Reserve hikes interest rates again.
JPMorgan’s chief markets strategist Marko Kolanovic says the risks of an interest rate shock and monetary tightening are “clear,” noting concerns over a consumer credit crunch, global real estate and funding to business could spawn a potential labor market slowdown.
But Belski and other street bulls point out the recession many predicted in 2023 hasn’t happened yet. After a historically aggressive rate hiking campaign, job openings and participation are back to pre-pandemic levels, fueling an unforseen resilence in consumer spending. Meanwhile, inflation has decreased faster than expected, even if a recent uptick has economists on pause.
“Unless trends in these indicators take a significant turn for the worse in the coming months, we believe the fabled soft-landing scenario is becoming increasingly more believable,” Belski wrote.
Fed chair Jerome Powell recently warned that the central bank has been monitoring the stronger than expected economic data and that the Fed is prepared to hold interest rates high in order to bring down inflation. But analysis by Belski’s team at BMO shows rates don’t necessarily mean doom for stocks.
Since 1979, the S&P 500 has gained 10.6% in the next year when the 10-year Treasury Yield was below its 3-year moving average while gaining 8.6% when yields were below the three-year average.
“More important, should yields begin to decline from current levels our analysis suggests that the market can deliver double-digit gain even if yields remain above average,” Belski wrote.
Earnings growth expected to improve
Earnings projections, seen by some as the single most important driver of stock prices, are rising. Recent data from Factset shows earnings estimates for the remainder of 2023 and 2024 full-year forecasts were revised up during July and August. Earnings estimates haven’t been revised over the first two months of a quarter since the third quarter of 2021.
This, Belski argues, bodes well for future company earnings and therefore stock prices.
“Revisions and earnings growth have exhibited a strong positive relationship historically with the former typically leading the latter by several months,” Belski wrote. “Therefore, we expect the recent uptick in revisions to translate into improved earnings growth in the coming months.”
Josh Schafer is a reporter for Yahoo Finance.
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