The significant rise in the stock market witnessed during the initial part of the year has come to an end. Investors should brace themselves for modest yields from now until the conclusion of 2023.

Stifel’s head equity strategist, Barry Bannister, informed clients in a note on Thursday that the rally observed in the absence of a recession has concluded. He further cautioned that the possibility of a recession impacting the US economy in the first quarter of 2024 still exists.

Bannister stated that the delayed impact of previous policy restrictions, continuous monitoring by the Federal Reserve, the threat of a mild oil crisis, and the approaching complete use of economic resources increase the possibility of a traditional, though not severe, U.S recession at the beginning of 2024.

Bannister’s perspective partially relies on the dedication of the Federal Reserve to reduce inflation to its enduring goal of 2%, despite the fact that it’s presently inching towards 3%.

Bannister stated that the former inflation limit has become the current minimum inflation rate. He implied that a significant effort will be needed to decrease inflation from roughly 3% to approximately 2%.

The CPI report for July probably strengthened Bannister’s perspective as it revealed a 0.2% increase in prices month-over-month and a roughly 3.2% rise from the previous year, which is higher than the 3.0% recorded in June.

The S&P 500 has risen approximately 17% since the beginning of the year, but has dropped roughly 3% since August commenced. Bannister predicts the S&P 500 will end the year at 4,400, indicating a probable decline of about 2% from its present values.

Bannister expects the stock market to move sideways from now until the end of the year, which would not be unusual according to seasonality data.

The data from Bank of America indicates that in the third year of the Presidential Cycle, between July and December, stock market yields are usually subdued. The Presidential Cycle refers to a four-year phase of the stock market that aligns with the term of the US President.

Stephen Suttmeier of BofA made a note on Tuesday, stating that the S&P 500 is currently experiencing a less dynamic phase within the Presidential Cycle. Mean and median monthly returns demonstrate that the S&P 500 tends to perform well from January to July in the third year, followed by a lackluster performance from August through November. However, it usually rallies in December.

Bannister doesn’t appear to have a very positive outlook on the stock market as we approach 2024, judged by his current earnings predictions. He anticipates the S&P 500 to report earnings per share of $205 in 2023, with a modest improvement to $209 per share in 2024. This is considerably beneath the general expectation of the S&P 500 producing $226 in earnings per share the following year.

“Bannister claimed that if our prediction of a roughly stable EPS is correct, then the S&P 500 may likely remain unchanged too.”

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