Futures suggest Wall Street’s new week will begin cautiously, even if major stock barometers remain at record levels.
In the last three months alone, the Nasdaq Composite COMP has risen 13.8% and the S&P 500 SPX has gained 11.8%. Worrywarts searches for synonyms for bubble.
But a team at Bank of America, led by equity and quantitative strategist Savita Subramanian, remains bullish, raising their year-end S&P 500 target from 5,000 to 5,400.
To be clear, Subramanian believes a market pullback is likely, pointing out that on average since 1929 there have been 5% pullbacks three times a year and 10% corrections once a year.
“After four months without significant declines, we will arrive and our U.S. technical chief sees bearish divergences,” he wrote in a note dated Sunday. It is also true that the CBOE VIX VIX,
the measure of volatility known as the Wall Street Fear Gauge tends to rise 25% from the second quarter to November of previous election years, a sign that uncertainty is growing. But after the vote, the elimination of uncertainty makes a year-end rally more likely.
So, leaving that caveat aside, how does Subramanian reach the conclusion of ~5% further upside for the S&P 500 this year?
The BofA team reaches the S&P 500 target by considering five different methods of forecasting market levels. They then assign weights to each of these factors, which can vary based on market circumstances and investor preference at the time. These are shown in the table below.
Source: Bank of America
Currently the most optimistic of the five, and with a maximum weight of 30%, is the sell side indicator which produces a 2024 S&P 500 target of 5,706. However, the weighting has dropped from 40% because the SSI shows that analysts are perhaps already a little too optimistic.
Source: Bank of America
A purely technical factor is the 12 month price momentum, and this suggests a level of 5,543, although given the somewhat stretched amount of momentum, the weighting has dropped from 15% to 10%.
The Earnings Surprise Index yields a target of 5,523 and its weight has been increased from 10% to 15%. “Guidance is weak (likely due to conservatism at the start of the year), but BofA analysts are positive on earnings relative to consensus,” says Subramanian.
The long-term valuation factor predicts a level of 5,247 and its weight has dropped from 15% to 10%. “Valuation may not be a catalyst, but it has had strong predictive power on long-term returns,” says Subramanian. “Today’s multiple of 25 times normalized earnings implies annualized returns of +2.6% per year over the next decade based on the historical relationship,” he adds.
The largest contributor to the S&P 500’s overall target is the model’s increase in fair value from 4,400 to 5,050, with a doubling of the weight from 15% to 30%. This reflects a shift in the S&P 500’s mix toward sectors with higher margins and lower earnings risks, as demonstrated by the continued stability of margins despite a surge in interest rate volatility and inflation, according to the BofA team.
Source: Bank of America
“We see the potential for improved margin stability from here on, as companies move from global cost arbitrage and free capital-driven growth to efficiency/productivity,” they say.
Addressing accusations that the market is experiencing a dangerous euphoria, Subramanian and his team say that this sentiment is “thematic and secular” and primarily concerns artificial intelligence and weight-loss drugs, and that they expect the market to expand beyond these themes.
“The sell side has become more bullish on equities…but pension fund allocations to public equities are still at 20-year lows, and positioning in unique themes like high-beta stocks and cyclical sectors is at the extremes bearish.”
Markets
US stock index futures ES00,
YM00,
NQ00,
are mixed since the benchmark Treasury bond yields are NQ00,
move higher. The dollar DXY is slightly lower, while oil prices CL.1,
stable around 80 dollars a barrel and gold GC00,
it trades around $2,080 an ounce.
|
Performance of key assets |
Last |
5 Q |
1 m |
Current year |
1 years |
|
S&P500 |
5,137.08 |
0.95% |
3.60% |
7.70% |
26.98% |
|
Nasdaq composite |
16,274.94 |
1.74% |
4.13% |
8.42% |
39.23% |
|
Ten-year treasure |
4,212 |
-7.05 |
5.03 |
33.11 |
24.74 |
|
Gold |
2,092.90 |
2.54% |
2.52% |
1.02% |
12.98% |
|
Oil |
79.94 |
3.02% |
9.81% |
12.07% |
-0.68% |
|
Data: MarketWatch. Change in Treasury bond yields expressed in basis points |
|||||
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The buzz
Apple AAPL shares fell 1.5% after the European Union fined the US tech giant nearly $2 billion for violating the bloc’s competition laws by unfairly favoring its music streaming service over rivals .
The fourth-quarter 2023 U.S. corporate earnings season is largely over, although there are some delays. GitLab GTLB,
SFIX fixed point,
and scientific applications SAIC international,
are among those who will publish results after the close on Monday.
No major US economic data is expected on Monday. Philadelphia Fed President Tom Harker will make comments at noon Eastern.
The most important Fed speech of the week will likely come from Chairman Jay Powell when he testifies to Congress on Wednesday and Thursday. The February nonfarm payrolls report will be released Friday.
Japan’s Nikkei 225 index JP:NIK rose above 40,000 for the first time as the global tech rally continued.
The Chinese government said it would eliminate the premier’s annual press conference, which was one of the few occasions when a major Chinese leader answered questions from the media.
US Crude Futures CL.1,
are trading around $80 a barrel, with the market absorbing the news that OPEC+ will extend voluntary production cuts into the second quarter.
Super Micro Computer SMCI shares,
are up nearly 12% following news last Friday that it would join the S&P 500 Index.
BitcoinBTCUSD,
rose above $65,000, helping boost Coinbase Global COIN shares,
the cryptocurrency trading site, up 6.5%.
The Bank for International Settlements says options-selling ETFs are helping to suppress the VIX.
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The graph
The past two weeks of fund inflows into the VanEck Semiconductor ETF SMH and the iShares Semiconductor ETF SOXX are the highest on record, according to The Market Ear, and show how much investors value chips. As TME puts it: “The last time we saw a surge like this was at the end of 2021, just before weakness set in.”
The best tickers
Here are the most active stock market tickers on MarketWatch as of 6 a.m. Eastern.
|
Ticker |
Security name |
|
NVDA, |
Nvidia |
|
TSLA, |
Tesla |
|
SMCI, |
Supermicrocomputer |
|
TSM, |
ADR for Taiwan semiconductor manufacturing |
|
AMD, |
Advanced microdevices |
|
MARA, |
Digital marathon |
|
GME, |
GameStop |
|
AAPL, |
Apple |
|
PLTR, |
Palantir Technologies |
|
NIO, |
NIO |
Random readings
The origins of a disgusting ritual in which Kylie Minoque took part.
Living on a train.
This is your captain speaking: push!
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