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Friday, July 8, 2022
One of the biggest bulls on Wall Street has finally pared back their optimism for the rest of this year.
In a note to clients published Thursday, Oppenheimer Asset Management Chief Investment Strategist John Stoltzfus cut his year-end price target on the S&P 500 to 4,800 from 5,330. The benchmark index closed at 3,902 on Thursday.
Before this cut, Stoltzfus had maintained the highest year-end price target among Wall Street strategists tracked by Yahoo Finance. Stoltzfus had also reiterated this call as recently as June 21.
This outlook stills suggests a nearly 25% rally in the benchmark index through the end of this year and implies the index will rise fractionally during 2022, closing 0.7% higher than where stocks ended 2021.
"The incursion into Ukraine by Russia and China’s lockdown of Shanghai (a city of over 25 million people) as well as of other cities in China added catalysts over the course of the first half of this year which have, along with higher and stickier inflation, added enough uncertainty and soured sentiment to negatively challenge equity market performance to a greater extent than we had earlier expected," Stoltzfus stated.
Ever an optimist on the U.S. economy and equity market, Stoltzfus added that "our longer-term outlook for the US economy and the stock market remains decidedly bullish. We believe US economic fundamentals remain on solid footing. US growth should remain well supported by consumer demand, business investment, and government spending."
Stoltzfus' call comes as investors have recently paid closer attention to the spread between earnings expectations and the signals from economic data. As we flagged in Wednesday's edition of the Morning Brief, analysts have hardly changed their earnings expectations for S&P 500 companies.
During the second quarter, bottom-up earnings estimates fell just 1.1%, according to data from FactSet. Over the last 15 years, earnings estimates fell an average of 4.7% during a given quarter.
Oppenheimer is also not revising their earnings expectations downward, with Stoltzfus reiterating expectations for S&P 500 companies to earn $230 per share this year.
What ultimately brought down Stoltzfus' expectations for the S&P 500 is multiple compression.
As we covered in this space last year, the market's "multiple"— or price-to-earnings ratio — can be simply thought of as the amount investors are willing to pay for $1 of earnings power. Stoltzfus now expects the S&P 500 to trade at 20.9 times next year's earnings by year-end, down from 23.1 times forward earnings in his prior forecast. Typically, as interest rates rise through an economic cycle and expected growth slows, multiples compress.
The present debate among investors, of course, is whether the market is anticipating a slowdown or an outright recession. Earlier this week, some analysts argued the combination of falling rates, falling commodity prices, and a surging dollar indicated a recessionary trade had taken hold in financial markets.
And while Stoltzfus says current recession risks are "palpable" among investors, the persistent inflation and rising interest rates that have shocked the financial system should ultimately be overcome by a flexible and opportunistic corporate sector.
"In time, the competitive pressures — driven in part by technology and innovation — that kept prices in check over the previous economic cycle should re-emerge as companies adapt to a new economic reality," Stoltzfus wrote. "We continue to expect that a growing US economy will help power a global recovery as US import demand draws in goods and services from around the world."
What to Watch Today
8:30 a.m. ET: Change in Nonfarm Payrolls, June (+268,000 expected, +390,000 during prior month)
8:30 a.m. ET: Change in Private Payrolls, June (+237,000 expected, +333,000 during prior month)
8:30 a.m. ET: Change in Manufacturing Payrolls, June (+21,000 expected, +18,000 during prior month)
8:30 a.m. ET: Unemployment Rate, June (3.6% expected, 3.6% during prior month)
8:30 a.m. ET: Average Hourly Earnings, month-over-month, June (+0.3% expected, +0.3% during prior month)
8:30 a.m. ET: Average Hourly Earnings, year-over-year, June (+5.0% expected, +5.2% prior month)
8:30 a.m. ET: Average Weekly Hours All Employees, June (34.6 expected, 34.6 during prior month)
8:30 a.m. ET: Labor Force Participation Rate, June (62.4% expected, 62.3% during prior month)
8:30 a.m. ET: Underemployment Rate, June (7.1% prior month)
10:00 a.m. ET: Wholesale Inventories, month-over-month, May final (+2% expected, +2% during prior month)
10:00 a.m. ET: Wholesale Trade Sales, month-over-month, May (+1% during prior month)
10:00 a.m. ET: Consumer Credit, May ($30.9 billion expected, $38.1 during prior month)
No notable reports scheduled for release.
No notable reports scheduled for release.