While investors seem generally wary about the stock market outside of tech, a growing chorus of Wall Street voices are making more optimistic noises lately.
Following an upgrade for U.S. stocks from Citigroup last week, Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, on Tuesday lifted her year-end S&P 500
SPX,
target to 4,250 from 4,100, with her bullish case seeing a 4,400 to 4,600 finish.
Investor negativity is one of the key reasons Calvasina sees more opportunity in equities. Last week’s American Association of Individual Investors survey showed investor pessimism toward stocks above average levels for the 14th straight week.
Overall, Calvasina forecasts a 10% bump coming for the S&P 500, which is already up more than 9% this year — though badly lagging the Nasdaq Composite’s 23% gain, largely to Nvidia
NVDA,
and AI tech plays.
She says overall, there are more positives to see right now.
Read: From McDonald’s to Morgan Stanley, UBS says these stocks are favorably positioned for AI.
“In recent client meetings, investors have taken note when our RBC derivatives strategist has highlighted how few are priced for an upcrash. We’ve also been struck by how many bearish leaning investors have been asking us to walk them through the bull case and explain why stocks have been so resilient,” said Calvasina.
She said their least optimistic outlook for the S&P 500 sees a finish of 3,800, which reflects a sluggish economy. Her most bullish case that sees a possible 4,600 finish “bakes in the average S&P 500 return in the third years of a presidential cycle (16.3%).”
She adds that apart from polling that says a victory by President Joe Biden may not be so certain, recent debt ceiling drama may be lifting equities because it looks as if “Republicans scored a win at Biden’s expense and have the momentum for now.”
The strategist also raised her 2023 earnings per share forecast from $200 to $213, mostly due to expectations that margins will be more durable this year than they expected, after a better-than-expected first quarter on that measure.
RBC’s EPS forecast remains below bottom-up consensus views of $220, but Calvasina said those outlooks tend to fall in the middle of the year. “Additionally, our work suggests that stock prices tend to discount earnings trends in advance, something we think more bearish voices for the stock market in 2023 have failed to remember,” she said.
She said the S&P 500 “baked in a 2023 EPS recession at the October 2022 low, and that current pricing in the S&P 500 is already anticipating an earnings recovery in 2024.”
The strategist also gave a “very preliminary” 2024 EPS forecast owing to heavy inquiry from clients, noting that it’s below bottom-up consensus of $244. It assumes consumer prices will fall slightly to just above 2%, growth and industrial production will recover in the back half of the year and investors will see Fed rate cuts.
Digging further into market leadership, Calvasina said large-cap growth has earned its spot at the top, but that the move now mostly driven by tech and AI excitement, is looking “stretched.” RBC is overweight tech and is sticking with “the best of that trade,” but she suggests diversifying value exposure — they prefer energy.
Patient investors may also be finding their moment to enter small-caps, she said, though adding large-caps won’t easily step aside. The main reason is that larger companies have a better earnings profile than their smaller rivals. Calvasina said their small-cap overweight will stay because those stocks are just now starting to shift into favor, they are deeply undervalued, and easing cycles and periods of economic stress often prove a good buying opportunities.
Wall Street had a generally less-optimistic view of the S&P 500 headed into 2023, with most expecting an S&P 500 a finish of around 4,000 after many forecasters missed the mark in 2022.
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