Stifel says the S&P 500 will rally 15% over the next 6 months as inflation cools

Published Mon, Oct 24 20229:47 AM EDT

Expect the S & P 500 to rally as much as 15% over the next six months as inflation cools and the Federal Reserve pares back its aggressive tightening campaign, Stifel says. The firm's strategist Barry Bannister said in a note to clients Sunday that the benchmark index should hit 4,300 by April 2023, assuming that inflation eases and the central bank's hawkishness has peaked. "On the bullish side, we note that fighting history is like fighting the Fed, and cumulatively for 60 years the S & P 500 return is almost nil the 6 months May-October while the next 6 months (November-April) provide almost all cumulative return," Bannister said. The setup Bannister describes depends on no recession occurring during the first half of 2023 and the Federal Reserve refraining from upping the 10-year TIPS yield. Also, the S & P must outperform the commodity index. "We do not think a 'classic' U.S. recession has begun, and yet the S & P 500 has already fallen in-line with a post-WW2 recession average," he wrote. Bannister's call comes after the S & P and major averages capped off their best week since June on Friday. Strategists have been tweaking estimates as the end of the year approaches. BMO Capital Markets' chief investment strategist Brian Belski trimmed his year-end S & P price target to 4,300, saying he had underestimated the influence of inflation. Other banks including Citigroup have cut expectations in recent weeks. Near-term trends favor cyclical stocks like the beaten-up semiconductors, media and entertainment and tech hardware stocks, Bannister said. But to be sure, he does see risks ahead beyond 2023, noting that a "secular bear market" is underway over the next decade. This environment supports an active management strategy favoring defensives during a slowdown and cyclical stocks during recoveries, he added. "Longer term, from the Jan-3, 2021 S & P 500 high (4,800 nominal, 5,100 real), we see the P/E ratio cut in half in the 10 years 2021 to 2031E offset by EPS doubling in the same period (7.2% CAGR), which leaves the S & P 500 index price about flat in 2031 versus 2021 in real or nominal terms," Bannister wrote. —CNBC's Michael Bloom contributed to this report.