The S&P 500 (.SPX) will end the year a little above its current level after a recent rally that has lifted the index from its bear market lows.
Stronger-than-expected corporate earnings and forecasts, along with optimism the U.S. Federal Reserve may avoid crippling the economy as it hikes interest rates in its fight against decades-high inflation, have lifted the S&P 500 about 13% from lows in mid-June.
The benchmark will end this year at 4,280, according to the median forecast of nearly 50 strategists polled by Reuters during the last two weeks. That is 3.4% higher than Monday’s close of 4,137.99.
That median forecast for 2022 was down from a forecast of 4,400 in a Reuters poll conducted in late May.
Strategists in the latest Reuters poll expected the S&P 500 to continue to rise in 2023, and hit 4,408 by mid-year, according to the poll’s median forecast.
Professional investors and analysts have historically had poor track records predicting stock market returns, but their forecasts provide a valuable glimpse of sentiment on Wall Street.
The S&P 500 remains down about 13% this year so far after tumbling into its second bear market since the 2020 global sell-off caused by the coronavirus pandemic.
Slightly over half the strategists in the poll expected more downside risks to their forecast than upside, while most strategists polled expected market volatility to rise rather than decline in the coming three months.
“Going into September, that’s a murky month for equities,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “I would suggest we could then see a pullback somewhat, but nothing that would suggest we would make new lows, because I believe the market has made a low.” Cardillo sees the S&P 500 ending the year at 4,350.
“Toward the end of the year, we could begin to rally. The Fed is not going to get overly aggressive. I see signs of inflation coming down, and I believe the labor market will soon begin to weaken, and that should alleviate the Fed from getting overly aggressive.”
The Fed has lifted its benchmark overnight interest rate by 2.25 percentage points this year as it tries to curb decades-high inflation, and investors continue to weigh how aggressive the U.S. central bank may need to be going forward.
Investors are hoping the Fed may shed light on how big future rate hikes might be and how strong the economy is when central banking heavyweights, including Fed Chair Jerome Powell, meet this week for their annual symposium in Jackson Hole, Wyoming.
“We say there’s a 50/50 chance there’s going to be recession next year. Will the Fed stay active if we go into a recession? That’s what we don’t know,” said John Augustine, chief investment officer at Huntington National Bank in Columbus, Ohio. “We have to hear more from Powell.”
Recent corporate earnings have supported stocks. With results in from most of S&P 500 companies, second-quarter earnings are expected to have climbed 8.8% from a year ago, above the 5.6% estimated on July 1, according to IBES data from Refinitiv IBES.
Analysts’ estimates for full-year profit growth have come down slightly since the start of July, but they still forecast growth of 8% for 2022, the data showed.
Investors have worried whether profits can grow fast enough to support stock valuations, especially with the recent rally. The S&P 500’s forward 12-month price-to-earnings ratio is now at about 18 compared with 22 at the end of December and its long-term average of about 16, according to Refinitiv data.
Based on the poll, the Dow Jones industrial average (.DJI) will finish the year at 34,200, up about 3.4% from Monday’s close.