The next leg of gains for the S&P 500 is coming. Here’s how investors need to prepare, say these strategists.
The next leg of gains for the S&P 500 is coming. Here’s how investors need to prepare, say these strategists.
As the quarter winds down, many investors are likely pondering what the next few months will bring. Our call of the day comes from a team at Societe Generale, led by strategists Manish Kabra and Charles de Boissezon, who say “the next leg higher” for the S&P 500 won’t come until the first quarter of 2025, alongside a Fed rate-cutting cycle.
The strategists are sticking to their “already bullish” end-year S&P 500 target of 5,500. That’s as they point out the index is at a “critical juncture,” given narrow breadth, with just a few stocks leading the market higher.
They give two contrasting outlooks: The first is a bear-market phenomenon often seen in recessions. If this were the case — not unless the Fed starts hiking again they say — the S&P 500 would be at risk of dropping to 4,000.
The second would be a concentrated group of highflying stocks pushing the index into bubble ground — they say the index could hit 6,666 in this case, based on a past big bubble.
Kabra and his colleague argue that it takes time for a peak to form in equities, even if some major tech stocks are already pricing in bubble valuation levels. Nvidia for example, is trading at 25 times price to sales, slightly above Cisco or Microsoft at the TMT bubble’s peak, they note.
Still, given consensus is forecasting an average rise of 17% per annum in earnings per share for the “Magnificent Seven” over the next three years, they don’t think the Nasdaq-100 is as extended it was in 1999-2000 — yet.
“Some measures indicate that we are not at the peak of the valuation bubble yet, and our simple TMT bubble math puts the S&P 500 at 6,666 should a bubble form,” the strategists said.
So what’s the game plan for Kabra and de Boissezon? They remain a fan of tech and are keeping an overweight on the sector. “However, as the profit cycle outside the Nasdaq-100 companies should move from -10% in 2023 to +8% by end 2024, we have identified cyclical opportunities outside tech too,” they say.
“So, instead of taking cyclical risk within tech, where high-risk stocks have already performed well, we suggest opting for financials and industrials,” they said.
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