The stock market may have more room to run in 2023.
Oppenheimer Asset Management boosted its S&P 500 year-end price target to 4,900 from 4,400 in a new note on Tuesday, citing recent strong data readings on the US economy. That would bring a new record end to the year for the S&P 500, which has never closed out a calendar year above 4,766.
"Our price target assumes that the resilience exhibited by the US economy will continue along with a high level of sensitivity by the Federal Reserve in raising its benchmark rates further to slow the inflation rate toward its 2% target," Oppenheimer chief investment strategist John Stoltzfus wrote.
Economic data over the last month has painted a more positive picture of the US economy than many thought more than halfway through 2023. Inflation is cooling while Americans continue to gain jobs at a healthy clip, and consumers have remained resilient.
The upbeat prints have the Federal Reserve no longer predicting a recession in 2023 and officials more optimistic about the Fed's rate hiking cycle ending with a "soft landing," where inflation stabilizes without economic growth taking a significant downturn. Stoltzfus believes the current economic outlook brings the Fed closer to a "pause or an end than it has been since March 2022."
The strong economic data has investors feeling more confident in the Fed's path forward, which has helped send stocks higher. The sectors that have benefited from the optimism have shifted, too.
After Tech and Communications services led the "Magnificent Seven"-driven rally to start 2023, all 11 sectors are positive over the last two months. Cyclical sectors like Materials (XLB) and Industrials (XLI) are now up more than 14% this year. This, Stoltzfus said, brings the breadth to the market rally many strategists had been calling for earlier this year and could give stocks the "legs to run higher into 2024."
"In our view, sector performance continues to suggest where the market wants to go despite fears of recession, inflation, aggressive monetary policy, and problems earlier this year among some regional banks," Stoltzfus wrote.
Other strategists have boosted their price targets in the last several months with hopes that a soft landing in sight and inflation cooling could serve as a tailwind for stocks to rise higher. In early July, Fundstrat's Tom Lee called for the S&P 500 to close at 4,825 by the end of 2023.
"I know this sounds counterintuitive since we had no 'recession' nor 'Fed cutting rates,' but we have had a huge decline in inflation, and as we argued for most of 2022, the inflation war is the war the Fed is waging and seemingly winning," Lee wrote on July 3, before the most recent prints on inflation.
On Monday, Citi also boosted its full-year outlook on the S&P 500 due to an upbeat stance on the economy. Citi upped its 2023 S&P 500 closing price to 4,600 from 4,000 and its mid-2024 target to 5,000 from 4,400.
"The near-term hurdles we envisioned headed into Q3 are now behind," Citi managing director Scott Chronert wrote. "The new targets reflect increased probability of a soft landing in our scenario approach."
Still, there are worries that the "last mile" to fight inflation will take longer than many expect. After all, the Fed's own inflation projections don't show it reaching its target 2% inflation rate until 2025.
Strategists worry if inflation remains sticky, or even reaccelerates, then more rate hikes may be on the horizon.
"Positive news on growth and inflation are fueling optimism for a soft-landing scenario in which inflation returns to target, providing space for DM central banks to ease," JPMorgan chief market strategist Marko Kolanovic wrote on Monday. "We remain skeptical of this outcome, however, anticipating the inflation decline to prove incomplete, leaving restrictive policies in place that should increase private sector vulnerabilities and end the global expansion."
Josh Schafer is a reporter for Yahoo Finance.