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Market Catalysts: Will the Rally Last?

Wall Street Strategist Divided Over Outlook as S&P 500 Enters Bull Market

Will the rally in the US equity market persist with the S&P 500 entering a bull market? That’s the million-dollar question in Wall Street as top strategists remain split on the way forward. The S&P 500 IS already up by more than 11% for the year and up by more than 20% from lows registered in October of last year.

US Equity Rally

The rally has come at the back of improving monetary policy sentiments, with the Federal Reserve showing signs of pausing on further interest rate hikes. Likewise, solid earnings reports have helped strengthen investor sentiments on risk-taking, helping fuel the stock market rally. Likewise, strategists at Goldman Sachs led by David J. Kostin believe the S&P 500 will end the year at 4,500, representing a further 4% gain from current levels.

The upgrade comes as a surprise as the strategists were bearish at the start of the year, warning that European and Asian stocks would do better than the US equities. The strategists had projected a significant decline in corporate profits that would affect sentiments in the market. That has not been the case, as most companies have delivered better-than-expected earnings, with the S&P 500 rallying by more than 5% since February.

The rally in the stock market has primarily been fueled by strong buying pressure in the tech sector. Investors have been jostling for positions on tech plays with exposure to artificial intelligence technology. Going forward, strategists at Goldman Sachs expect other sectors to also contribute to the broader stock market rally.

The stock market rally has already started showing signs of broadening, depicted by the Russel 2000 index outperforming the S&P 500 since the start of the month.   On the other hand, Bank of America strategist Savita Subramanian expects gains in the S&P 500 to continue in the next 12 months following the 20% rally from last year’s low.

US Equity Bearish Thesis

Meanwhile, not all strategists are upbeat about the US equity market outlook. Morgan Stanley analyst Michael Wilson remains skeptical. According to the analyst who accurately predicted last year’s meltdown, the narrow breadth of the rally in the market was a warning sign. He has also raised concerns about defensive plays’ lofty valuations and outperformance.

Goldman Sachs strategists, on their part, expect any downturn in the market from current levels to be a result of high inflation levels. Inflation refusing to come down to the recommended 2% could force the Federal Reserve into action, something that the strategists feel will be negative to the market.

The S&P 500 is trading at its highest valuation level since April of last year, helped by slowing inflation and healthy growth. Consequently, any signs of economic growth slowdown and inflation ticking higher could spook investors, something that could result in a correction to the downside.

Investors have been extremely cautious amid concern that the US economy could plunge into recession following the aggressive monetary policy tightening. There have been concerns that the hiking of interest rates to the 5% level would pause a significant danger to the economy by triggering a significant increase in borrowing costs. Amid the concerns, strategists at Goldman Sachs insist the probability of a recession is significantly lower.

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