Stocks are inching closer to all-time highs, as the S&P 500 (^GSPC) continues to receive a bullish outlook from strategists driven by three key factors. The index has demonstrated better-than-expected growth and Big Tech stocks have the potential to sustain their outperformance, fueling further gains. Investors' risk appetite also appears to have more room for expansion.
Investors are also bracing for potential downside risks. One major concern is the persistence of sticky inflation, which could continue to weigh on the economy. Additionally, the materialization of a recession remains a looming threat and if earnings fail to show meaningful growth, it could undermine the market's optimism.
Yahoo Finance's Josh Schafer breaks down the details.
For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.
Editor's note: This article was written by Angel Smith
Video Transcript
BRAD SMITH: So next week, we're going to be beginning Q2 2024. Stocks are near all-time highs. The S&P 500 having its best first quarter performance since 2019. It is on track, as well, for its fifth straight month of gains here.
Here with insight on where the markets might be headed from here, we've got Yahoo Finance's Josh Schafer. Hey, Josh.
JOSH SCHAFER: Yeah, Brad. So we talked at the beginning of this week, we had the S&P 500 sitting above 5,200 now. That's essentially most macro strategy teams that we follow's target for the year, or above the target for the year that they had initially set.
So I went back to a lot of those folks this week and asked simply, where do we go from here? Do we come back down to your target? Do we go up? Where is sort of the likelihood?
Most strategists see risk to the upside right now. Binky Chadha over at Deutsche Bank said that's the question he's getting the most right now from investors, is what are the risks to the upside? And they see the risk to the upside pointing to their bull case at 5,500 right now.
And a couple of key things that-- this sort of spans all of the different strategists I talked to that they pointed out, but different sort of base cases. Excuse me.
One would be similar data to what you saw this morning, right, with that GDP number getting revised up better than expected growth. You guys were just highlighting the sector moves we've been seeing.
If you really strip out and think about what a bet on energy is, a bet on materials, a bet on industrials, we're betting on economic growth, right. We're betting on the economy there. So markets are sort of pricing in that soft landing pretty aggressively, pricing in an economy that's probably growing above a 2% rate. You need data to keep coming in that way, and then maybe you continue to see this broadening in the S&P 500 goes up.
Another thing that strategists pointed out, this was a chart from the team over at Deutsche Bank, talking about risk appetite. And essentially, saying they feel like risk appetite overall right now has more room to run.
We've been talking a little bit about meme stocks this week, a little bit about crypto moves, but we haven't gotten nearly the levels that we were at in, say, 2021 from a risk appetite perspective. Right now, strategists feel like that is largely backed in facts, backed in economic data, and backed in increases in earnings.
The last one, the last reason some people are saying we could see the S&P 500 go up higher, is kind of the crazy scenario, or crazier scenario. We start using that bubble word a little bit. And it would be big tech keeps outperforming, right.
We know big tech has high expectations for earnings. At this point, the concern to the upside there would be, what if they keep doing better than we expect and big tech outperforms? This bubble starts growing. And then at that point, Goldman had estimated we could get to 6,000 on the S&P 500 by the end of the year.
Not their base case. Important to note.
SEANA SMITH: Not their base case. Far from their base case. But certainly, when you see 6,000, you got to take a look into that call. The reason why we talked about it earlier this week.
All right, Josh, you just laid out some of those scenarios or some of the cases here for the risk to the upside. Let's talk about the flip side though, the risk to the downside. What does that look like?
JOSH SCHAFER: And the other thing that we should highlight, I wouldn't even call this, necessarily, risk to the downside, there's risk to the flat side, right. So let's start with that.
Basically, every strategist I talked to, like every strategist you guys talk to on air, said, we could probably use a breather. We've been up for five straight months. If the S&P 500 does nothing in April, investors shouldn't panic. That's sort of the advice.
To the actual downside, what could take us lower would be continuations of these sticky inflation readings we've been seeing. We're two months in. You heard Chair Powell sort of reference, well, there might have been some seasonal issues in January and February. How's March data come in? That's a big question right now.
The other thing would be recession, right. What if we finally do get some sort of economic slowing from all of this tightening? That would change the narrative here.
And then the final thing is, as we talked about with this broadening out that we've had, there is an expectation that the other 493 companies are eventually going to have their earnings bounce back. If that does not happen, that sort of deteriorates the rally that we've seen in those other sectors.
Same could be said for big tech. The earnings expectations are still lofty there. If earnings don't live up to the hype of a market that feels like it's currently priced for perfection, then you could also see moves to the downside.
SEANA SMITH: Yeah, any deterioration in the fundamentals, obviously, could be a huge concern for the market at these current evaluation.
