Wall Street Strategist Predicts Sideways Trading for Stocks

Barry Bannister, the chief equity strategist at Stifel, who accurately predicted the U.S. stock-market rally in the first half of 2023, now believes that stocks will remain stagnant until at least April 2024. Bannister has revised his S&P 500 target to 4,400 by April 2024, citing potential corporate earnings pressure due to higher interest rates.

In a note released on Monday, Bannister stated, "We believe the rally off the Oct. 2022 lows is over, and our view since summer 2023 has been a sideways trading range." He further added, "The updated view is that we now believe our year-end 2023 target of 4,400 applies through Apr. 30, 2024."

Bannister's accurate prediction of the stock-market rally earlier this year positions him as one of the few Wall Street strategists with reliable foresight. He warns of increased economic risk for equities in late 2023 as he anticipates stock gains to stall in the second half of the year. His original target of 4,400 for the S&P 500 in May indicated a potential 4.3% increase from Monday's closing value of 4,217.04.

Additionally, Bannister expects the key 10-year U.S. Treasury yield to peak at approximately 5% in the current cycle. However, looking towards the mid-2020s, he predicts a "normalized" 10-year yield of 5% or 6%, which could further impact corporate earnings.

See: S&P 500 has another high 2023 price target. Here's a look at Wall Street's official stock-market outlook.

In summary, Bannister's insights suggest a period of sideways trading for stocks until at least April 2024, with the potential for increased economic risk in late 2023. While other analysts may remain bullish on the market, Bannister's accurate track record positions his predictions with credibility. Investors should keep an eye on the potential impact of higher interest rates on corporate earnings in the coming years.

The Rise of 10-Year Treasury Yield

The 10-year Treasury yield made significant strides on Monday, reaching an intraday high of 5.02% during morning trading - a level not seen since 2007. By the end of the New York session, it slightly retreated to finish at 4.836%, according to Dow Jones Market Data.

Fed's Shift in Policy

According to experts, this surge in Treasury yield indicates a shift in Federal Reserve policy. Rather than maintaining a protracted period of low rates as previously suggested, the Fed has now returned to "policy modulation at normalized rates," as stated by an unnamed analyst.

Impact on Stock Prices

Furthermore, the health of the U.S. labor market is identified as a significant factor contributing to this change in Fed policy. The strength of the labor market has led to "the Fed rate normalization," resulting in tightened financial conditions that may potentially impact price-to-earnings ratios for stocks.

Understanding Price-to-Earnings Ratios

Price-to-earnings ratios, also known as price multiples, serve as key indicators of stock valuation. This ratio is determined by dividing a stock price by a public company's yearly earnings per share.

Forecast for the S&P 500

Considering the implications of tightening financial conditions on price-to-earnings ratios, experts predict that the S&P 500 will remain relatively flat or "range-bound" throughout the 2020s decade. However, potential growth in earnings-per-share (EPS) may offset this stagnation. In fact, it is projected that the S&P 500 EPS will at least double from $156 in 2019 to a range of $300-325 by 2030.

Understanding Earnings-per-Share (EPS)

EPS is a crucial measure that illustrates a company's net profit divided by the number of common shares it has outstanding. Essentially, it determines how much money a company generates for each share of its stock.

Market Performance on Monday

On Monday, U.S. stocks experienced mixed results. While the Dow Jones Industrial Average (DJIA) witnessed a decline of 190 points, or 0.6%, to conclude at 32,936, the Nasdaq Composite (COMP) marginally increased by 0.3%, according to FactSet data.