An upcoming “economic soft patch” is likely to weigh on the recent U.S. equity rally and stall sectors such as consumer discretionary and small-cap stocks, Wells Fargo Investment Institute strategists warned in a note Monday.
The firm cut its 2024 earnings estimate for the Russell 2000 index of small-cap stocks while keeping its 2024 S&P 500 target price range between 4,600 and 4,800. The index traded near 4,550 on Monday.
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While the U.S. economy is slowing, it hasn’t gotten bad enough to justify the Federal Reserve starting to cut interest rates, the firm noted. As a result, the economy is likely to suffer from the pressure of tighter credit for longer than markets seem to anticipate, it said.
“It is our belief that equity rallies will be limited until a path to economic and earnings recovery becomes clear,” the firm noted, adding that it suggests investors add to large-cap technology stocks if the S&P 500 falls near its bottom. range for the year.
Market looks stable as global stocks head for big monthly gains
The benchmark S&P 500 has risen more than 10% over the past three weeks as Treasury yields fell from 16-year highs following signs of cooling inflation and a weakening labor market, helping boost valuations in technology and other growth sectors. It hit a high for the year at the end of July, as predictions of an imminent recession lowered the Treasury bill.
GDPNow estimates from the Atlanta Fed show US gross domestic product growing at a 2.1% annual rate in the fourth quarter, down from a third quarter reading of 5.1% in early October.
Overall, futures markets forecast a 22% chance the Fed starts cutting rates in March, up from a 13.7% chance seen a month ago, according to CME’s FedWatch Tool.
A rebound in the global economy in the second half of 2024 is likely to push stocks higher as a weakening dollar and falling interest rates spark a global risk build-up, Wells Fargo said.
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Updated: 28 Nov 2023, 13:17 IST
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