By Jennifer Sor June 19, 2023 Business Insider
The S&P 500 is now up over 20% from its low in October, a technical signal that it is officially in a new bull market — but Wall Street remains torn on whether the current rally is truly the start of a new bull run, or a head fake before stocks inevitably crash again.
The benchmark index has largely been boosted by the rally in mega-cap tech stocks, thanks to Wall Street's enthusiasm for artificial intelligence. Analysts say AI could boost productivity, profits, and take stocks higher in coming years, overlooking concerns for now that a dot-com style bubble is forming in the sector.
Experts remain concerned about a looming recession, with alarms coming from all sorts of economic indicators, from falling cardboard demand to declining RV sales. The US now has a 70% chance of tipping into recession by May 2024, per the latest projections from the New York Fed – an event that could easily throw the rally in stocks to the wayside.
Here's what Wall Street commentators have to say on whether the current rally in stocks still has room to run.
The rally in stocks isn't backed by fundamentals and it won't last long, as the US is practically guaranteed to enter a recession this year, according to top economist David Rosenberg.
That's because the S&P 500's strong performance this year is at odds with economic data, Rosenberg said. Unemployment claims, for instance, rose another 1,000 to 262,000 over the past week, sticking to the highest level since October 2021.
Meanwhile, rising interest rates over the past year are tightening financial conditions, making recession more likely. And though central bankers kept rates steady at their policy meeting on Wednesday, officials suggested more hikes could be in store later this year as inflation remains a threat.
"This market continues to be nothing more than a short-term momentum play," Rosenberg said in a recent note. "You can believe the press headlines or you can believe the leading indicators — which suggest that we do indeed have a 99.15% chance of an official NBER-defined recession," he said.
Investors can expect the rally in stocks to end as the US enters a mild recession this year, according to top economist Jeremy Siegel.
Siegel has been a loud critic of the Fed policy in the last year, and has urged central bankers to pull back on interest rates increases in order to avoid causing a recession.
Though he previously predicted a 15% increase for the S&P 500, he's turned more bearish on the market as recession odds increase. Stocks will likely slip as the US is on the path to a shallow recession this year, he predicted, though equities are unlikely to drop back to lows reached in October of last year.
"This recent bull market move is no guarantee we are out of the woods from the downturn," Siegel said in his weekly commentary piece for WisdomTree on Monday. "I remain cautious and I do not think we have the start of a major up move here," he added.
The current rally in stocks is a fluke, and the bear market is still alive. Importantly, corporate earnings are set to drop through the rest of this year, which will spark a sell-0ff, according to Morgan Stanley's top stock strategist Mike Wilson.
Wilson has warned of a steep earnings recession for months. Corporations are still battling inflation pressures and tighter financial conditions, which could take profits down as much as 16%, he predicted.
"While we believe that AI is for real and will likely lead to some substantial efficiencies that help to fight inflation, it's unlikely to prevent the earnings recession we forecast for this year," Wilson said in a recent note.
Fundstrat's Tom Lee, among the first to call the bull market in stocks, thinks the rally has room to expand beyond the tech sector.
In Lee's view, the economy is actually on the verge of an expansion, not a recession. Inflation is showing signs of softening, and businesses are actually headed for a boom in profitability.
"Instead of a recession unfolding, it looks like the economy is slipping into an expansion, he said in a recent interview with CNBC. "I don't think stocks are extended. I think the FAANGS did the heavy lifting and I think if we are slipping into an expansion, a lot of other groups are going to participate," he later added.
The hype for AI is real and could lead the S&P 500 to climb higher this year, Goldman Sachs said.
The investment bank touted the potential benefits of AI, as firms adopting the technology could see a boost in productivity and therefore, a boost to earnings. That could take the S&P 500 as much as 14% higher in the coming years, strategists said.
And though the AI excitement has primarily boosted tech stocks, the rally could spill over into other sectors, as previous episodes of narrow market breadth have translated into a larger percentage of winning stocks in the S&P 500 overall.
The bank has also lowered its estimate of recession hitting the economy this year to 25%, down from a 35% chance predicted earlier this year.
The S&P 500 could end the year at 4,500, strategists predicted, implying around a 5% upside from current levels and a gain of about 17% for the full year.