Economic data continues to come in stronger than expected, leading economists to push back their calls for a recession and in turn increasingly prompting Wall Street strategists to become more bullish on stocks.
On Tuesday, Jefferies upgraded its year-end target for the S&P 500 from 4,050 to 4,500.
"As a soft landing is the more likely outcome now, earnings will be much more resilient than previously expected" Jefferies global head of microstrategy Desh Permunetilleke.
With the Artificial Intelligence rally that sent price targets higher before the summer now cooling off during second quarter earnings reports, strategists have turned to the resilient US economy as the next catalyst to support the market rally.
From a Taylor Swift and Barbie shoutout at the most recent Federal Reserve press conference, to Gross Domestic Product (GDP) surprising to the upside in the second quarter, a US consumer that's still willing to spend more than many thought possible has been at the forefront of the economic story during the summer of 2023.
And as each rosier than expected data point rolls in, discussions about a so-called "soft landing" conclusion to the Fed's hiking cycle, where inflation stabilizes without economic growth taking a significant downturn, have intensified and become the latest talking point strategists point to when explaining why the S&P 500 is likely to end 2023 higher than Wall Street expected.
On July 31, Citi managing director Scott Chronert boosted his 2023 S&P 500 closing price to 4,600 from 4,000 and its mid-2024 target to 5,000 from 4,400. Chronert wrote that the new target reflected an "increased probability of a soft landing." On August 1, Oppenheimer Asset Management boosted its S&P 500 year-end price target to 4,900 from 4,400.
"Our price target assumes that the resilience exhibited by the US economy will continue along with a high level of sensitivity by the Federal Reserve in raising its benchmark rates further to slow the inflation rate toward its 2% target," Oppenheimer chief investment strategist John Stoltzfus wrote.
Personal consumption makes up about 70% of US GDP and many indicators that contribute to consumption have shown resiliency. The labor market has come off pandemic highs but is still adding jobs alongside a historically low unemployment rate and increasing wages. Early indicators are consumers have kept spending to start the third quarter, too, with July's retail sales report showing sales increased 0.7% in the month.
While not red hot, the economic indicators are showing signs of what Goldman Sachs chief economist Jan Hatizus has dubbed "unspectacular growth." And that could be enough to keep stocks higher while presenting buying opportunities in certain sectors.
On Monday, Bank of America upgraded the consumer discretionary sector (XLY) to Overweight from Underweight, citing its economics team's recent call that the Fed's rate hike cycle won't end in a recession.
"Our economists forecast a soft landing, but investors appear positioned for a [Great Financial Crisis]-style recession," Subramanian wrote in a new note on Monday. "Active funds’ relative weight in Consumer Discretionary is at all-time lows in our data history for both long-only funds and hedge funds."
Josh Schafer is a reporter for Yahoo Finance.
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