Stocks rose through the first three months of the year, boosted by investor confidence in the resilience of the U.S. economy.
As the second quarter begins, Wall Street is deliberating whether the S&P 500 (^GSPC) has more room to grow following its strongest quarterly performance since 2019.
The market rally has diversified away from a select few earnings-driving stocks to investors favoring sectors influenced by economic shifts such as Materials (XLB) and Industrials (XLI). The prevailing sentiment is that the U.S. economy will continue to grow as long as inflation approaches the Federal Reserve’s 2% target, a scenario often called a “soft landing.”
However, amid five consecutive months of S&P gains, some are predicting a possible slowdown.
Scott Chronert, Citi’s US equity strategist, explains: “You’ve seen this strong move… in anticipation of, say, a Goldilocks or soft landing scenario.” It predicts a period of consolidation to absorb recent gains and allow fundamentals to align with market performance.
Goldman Sachs’ equity strategy team maintains a year-end target of 5,200 for the S&P 500, but has explored alternative scenarios given the market rises beyond current projections.
Negative scenarios include overly optimistic earnings expectations for large-cap technology companies and possible Fed policies leading to prolonged higher interest rates, which could slow economic growth.
JPMorgan chief market strategist Marko Kolanovic warns of the risk of returning to a stagflation narrative reminiscent of the 1970s, citing volatile inflation readings and their potential impact on future Federal Reserve actions.
Bullish scenarios involve higher earnings driven by outperformance by Big Tech or a broader market rebound supported by a strong economic outlook and earnings growth across all sectors.
Goldman’s Ben Snider remains optimistic and advises investors to continue investing in the US stock market, citing favorable economic conditions and a low probability of a recession.
Deutsche Bank echoes this sentiment, with chief global strategist Binky Chadha signaling increased confidence in his bullish outlook for the S&P 500, anticipating further gains this year.
Despite the rally, risk appetite remains below levels seen in previous market rallies, indicating more cautious market sentiment.
Also read: Stock Market Remains Strong Despite Modest US Inflation: What You Need to Know