The Market’s Rally Has Bolstered Bulls. These Skeptics Remain.

Given how the Magnificent Seven—Apple, Amazon.com, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla—account for more than a quarter of the index, that rotation alone will be enough to slow its progress, if other smaller components are making the biggest gains.

Bannister expects the shift will come “as a result of economic growth, inflation and Federal Reserve tightness all proving resilient.”

To wit, Bannister doesn’t believe the Fed will cut interest rates in the first half of the year, contrary to the consensus view. He believes economic indicators will hold the central bank back, with S&P 500 earnings per share rising year over year in 2024 and unemployment likely to pull back in the spring.

In addition, Bannister argues the nation already experienced a pseudo-recession over a one-year period ending in March. During that time, excess labor demand fell without bringing down the number of actual jobs. It was masked by the lingering impact of pandemic-era spending.

Thus, the economy has been in expansion mode since, and because that pseudo-recession didn’t truly fix the labor imbalance—there are still more jobs to be filled, especially on the skilled side, than workers to fill them—wage growth is likely to remain above the Fed’s preferred level. The 3% inflation ceiling that marked the previous decade—when stock returns were great—might be the floor for this decade, Bannister notes.

All of that is to say that “the Fed holds the key to ‘double-dip’ [recession] risk in the second half of 2024,” he writes.

Bannister isn’t the only voice expressing concern during the market’s recent euphoria, particularly on the stubbornness of inflation and the potential for a downturn.

Citi’s
Global Chief Economist Nathan Sheets writes that while positive data in 2023 has increased the probability of a soft landing—not just for the U.S., but for the global economy as a whole—he still expects the last mile of the inflation fight will be tough.

“We continue to expect that the stringent monetary medicine that central banks have administered, coupled with a stepdown in consumer demand for services, will loosen labor markets and slow economic growth,” he notes.

Developed markets are particularly likely to feel the pinch, he believes, with some falling into a recession, including the U.S. in mid-2024.

“Taken together, we see global growth in 2024 retreating to 1.9%, before rebounding to 2.5% in 2025,” Sheets writes.

That said, Citi still thinks the S&P 500 will reach 5,000 by mid-2024, surpassing its previous record high, although it has yet to release its year-end forecast.

Plenty of other firms also expect the index to make gains next year, given what they expect to be a relatively mild recession—or none at all. Others argue that some mismatch between investors’ sunny expectations versus next year’s reality could lead to volatility, but not necessarily stock losses. Technical strategists also see the S&P 500 eventually breaking through its prior resistance levels, if not on the first try.

Here Stifel’s Bannister is the outlier, as he expects the S&P 500 to be rangebound for nearly a decade, as higher-for-longer interest rates favor more modest value-led returns. In other words, the 2020s won’t look like the 2010s, whose “high level of returns…is gone for a generation.”

Bearish voices in general have been in the background following the market’s rally, and there are many strategists willing to dispute Bannister’s gloomy outlook.

That leaves investors rooting for more gains and against Bannister’s strong record.

Write to Teresa Rivas at [email protected]