U.S. stocks experienced an unexpectedly strong rally in the first half of the year, but the momentum may not last, according to the Wells Fargo Investment Institute (WFII).
The S&P 500 index rose nearly 13 percent to reach 5,375 in mid-June, far exceeding its previous record and WFII’s 2024 target range of between 4,600 and 4,800.
While interest rates remain high, companies managed to achieve impressive profit growth, with profits up almost 6 percent in the first quarter, about double the estimated 3 percent.
But looking ahead, WFII believes the S&P 500 has limited growth potential for the second half of 2024.
When it comes to investing, WFII recommends large-cap stocks over small-cap stocks. Large-cap stocks are shares of companies with a market capitalization of $10 billion and are often considered safer investments.
The S&P 500 index rose nearly 13 percent to reach 5,375 in mid-June, far exceeding its previous record and WFII’s 2024 target range of between 4,600 and 4,800.
Larger companies with strong balance sheets are also expected to do better in a slowing economy.
WFII is bullish on certain sectors, including energy, healthcare, industrials and materials.
Wells Fargo favored energy stocks when the price of US crude oil was $71 per barrel.
Oil prices have now risen to around $78, but remain below the year’s high.
Healthcare stocks are also expected to see stable demand and earnings, while industrial and materials stocks should benefit from government stimulus, green energy transitions, data center growth and as supply chains supply returns to normal.
WFII Senior Global Market Strategist Sameer Samana expressed skepticism about future earnings over the next six months.
‘If I had to say which direction the next 7 or 10 percent is coming from, I would say it’s lower. “I can’t make the math work upwards, at least until something more significant changes,” Samana said.
The stock rally over the past year and a half has been fueled in part by people who fear missing out on the AI-powered rally.
Although Samana doesn’t foresee a market decline, he noted that current valuations for U.S. stocks are high, with the S&P 500’s forward earnings multiple at 21 times, suggesting that positive earnings growth this year is already priced in. the market.
“Because of those full valuations and because we’ve priced in quite a bit of that earnings growth, it probably means muted returns for much of the rest of this year,” Samana said.
‘I don’t think paying higher and higher multiples is a win-win game. “It’s definitely not something we want to play,” the strategist added.
The rally in stocks over the past year and a half has been fueled in part by people who fear missing out on the AI-powered surge, with the S&P 500 up more than 24 percent last year, despite minimal stock growth. profits due to inflation.
“Much of this can be attributed to difficulty in obtaining labor, persistently high input costs and disruptions in supply chains. “It seems like companies are finally starting to get a lot of that under control: a more normal operating environment,” Samana said.
“Unfortunately, earnings are starting to slow because the economy is starting to slow, and that can be seen primarily in the consumer-oriented parts of the S&P,” Samana said.
But as economic growth slows, generating revenue while maintaining profit margins will become more difficult.
WFII does not foresee a recession, but is cautious about the financial strain on low-income consumers, who are most affected by inflation and interest rates.
Geopolitical issues, including conflicts in Ukraine and the Middle East, could also increase market volatility.
While the S&P 500 continues to rise, WFII remains cautious and cautious about the outlook for the next six months.