Opinions from Wall Street: "There are premises that American stocks will increase next year"

Markets are counting on the Federal Reserve to have ended its rate hike cycle, which creates important conditions for the S&P 500 to appreciate significantly next year, according to several articles published late last week by Business Insider and Yahoo Finance.

Jessica Rabe, an analyst at DataTrek Research, pointed out that historically, highs in interest rates have typically been followed by strong gains for stocks. "In the year after the Fed stops raising rates, stocks tend to have double-digit growth and outperform the long-term average (annualized) price return of 9-10%. The only exception came after the March 2,000 surge following the bursting of the dot-com bubble," Rabe wrote.

According to data presented by analyst DataTrek, in the year following the end of the February 1995 rate hike cycle, the S&P 500 climbed 35.2%. The interest peak in June 2006 was followed by a 20.7% rise in the index the following year. And in the most recent case, after the end of the rate hike cycle in December 2018, the benchmark US stock market rose by 27.9% in the year that followed. Meanwhile, the average increase in the S&P 500 in the year following a peak in interest rates is 17.4%.

"The index is now at a level close to that of July 26, the time of the last interest rate hike, which the market believes represents the end of this cycle. Therefore, history suggests that the index may climb 17% through the first half of 2024," Rabe wrote. After the last inflation report in the middle of this month, which came in below analysts' estimates, the market is increasingly convinced that the Federal Reserve is done raising interest rates, and some experts, such as economics professor Jeremy Siegel, expect the Fed to start reducing rates in March next year. "In the months after the central bank starts cutting rates, equity returns are mixed," says Rabe.

• Manish Kabra, Societe Generale: "We expect a mild recession in the middle of the year, selling in the credit market and continued quantitative tightening"

Societe Generale expects a volatile year for the US stock market, with the S&P 500 nearing all-time highs, falling and then rebounding, according to Business Insider.

The bank expects the index to rise to 4,750 points in the first three months of 2024, close to the all-time high of 4,796 points in January 2022. It will then fall 12% to 4,200 points in the middle of next year as what a mild recession will hit the US economy, and then the S&P 500 will return to 4,750 points in the fourth quarter when the Federal Reserve begins to cut interest rates.

"By the end of next year we expect to see interest rate cuts of 150 basis points, a decline in GDP growth and clarity around the electoral political cycle. The S&P 500 should be in buy-the-dip territory as leading earnings indicators continue to improve," wrote Manish Kabra, chief strategist at American shares within Societe Generale.

"But the journey to the end of the year will not be smooth at all, as we expect a mild recession in the middle of the year, a sell-off in the credit market in the second quarter and continued quantitative tightening," the strategist added.

Since the start of the year through the middle of last week, the S&P 500 index was up about 19%, buoyed by the performance of the so-called "Magnificent Seven" in technology and investor expectations that the Federal Reserve is preparing to cut borrowing costs.

Kabra is not alone among top Wall Street strategists who expect the S&P 500 to approach all-time highs next year. David Kostin of Goldman Sachs said earlier this month that he expects the index to trade at 4,700 points by the end of 2024. Bank of America (BofA) and RBC Capital Markets have targets of 5,000 points for the S&P 500 at the end of next year, significantly above the previous all-time high, according to Business Insider.

• Savita Subramanian, BofA: "The market has already absorbed significant geopolitical shocks"

Savita Subramanian, equity strategist at Bank of America, believes next year will be a "stock picker's paradise" as this year's "maximum macro uncertainty" recedes, according to Yahoo Finance.

"The market has already absorbed significant geopolitical shocks (...). We are bullish not because we expect the Fed to cut rates, but because of what the Fed has accomplished. Companies adjusted (as they tend to do) to higher rates and inflation," the Subramanian-led team wrote in a report published last week. The BofA team's target of 5,000 points for the S&P 500 at the end of next year is about 10% above current levels.

• Gary Shilling, former chief economist at Merrill Lynch: "We're probably going to have a recession, if we're not already in one"

Contrary to the views above, Gary Shilling, former chief economist at Merrill Lynch and currently chairman of A. Gary Shilling & Co, believes stocks will depreciate by 30% because the US economy is "faltering", according to Business Insider.

"We're probably going to have a recession, if we're not already in one," Shilling said, pointing to the inverted yield curve, weakness in some leading indicators and the Fed's commitment to crushing inflation. "With such a combination, it's quite difficult to escape the recession", pointed out the former chief economist of Merrill Lynch, quoted by Business Insider.