- Tech stocks are poised to drive a 10% rally in the stock market this summer, according to Stifel's Barry Bannister.
- The rally would come as investors anticipate the Fed to end its interest rate hiking cycle in December, and as a recession is avoided.
- "The S&P 500 has removed all COVID froth, but we see no U.S. recession in 6 months and a summer rally," Bannister said.
Technology stocks are poised to drive a 10% rally in the stock market this summer as investors begin to anticipate a pause to the Federal Reserve's rate hike cycle by the end of the year, Stifel's Barry Bannister said in a Thursday note.
The potential upside move would send the S&P 500 to 4,150 and help it claw back some of this year's bear market losses, which have been driven by high inflation, rising interest rates, and growing fears of an economic recession.
But Bannister believes that while the stock market is currently pricing in an economic recession, the US will ultimately avoid such a downturn over the next six months, and that disconnect leaves upside potential for the stock market's current valuation multiple.
"The S&P 500 has removed all COVID froth, but we see no US recession in 6 months and a summer rally," Bannister said. "The S&P 500 already reflects a steep EPS recession, but our earnings estimates do not, for now, corroborate that fear."
Additionally, falling oil prices and budding investor anticipation that the Fed will end its interest rate hikes by the end of the year should translate into some buying pressure for equities, according to the note.
Bannister expects oil prices to fall to $85 per barrel by the end of the year on the potential for a ceasefire between Russia and Ukraine by year-end. "Ukraine's cost to the West has become untenable as GDP slows with inflation," Bannister said.
While falling oil prices would help tame inflation and give the Fed flexibility in its tightening cycle, falling interest rates would be a boon for technology stocks, which have been the worst performing sector of the year, falling nearly 30% year-to-date.
Higher interest rates have cut into the valuations of fast growing technology stocks that rely on raising capital to fuel their growth. As Fed chair Jerome Powell raised interest rates by 75 basis points in June, by 50 basis points in May, and by 25 basis points in April, the cost for a company to raise capital rose significantly, cutting into valuation multiples for the sector.
"Our 10Y Treasury yield view versus fed funds futures points to 10Y-3M inversion 1Q23, supportive of a Dec-2022 Fed pause," Bannister explained. The 10-year US Treasury yield has dropped by about 40 basis points from its cycle high of 3.5%.
While Bannister sees a rally in the short-term, the equity strategist is still bearish over the long-term, calling the potential rally a cyclical bull within a secular bear.
"The S&P 500 in 2022 likely entered a 'secular bear market' although the process is not linear... A secular bear market entails a wide trading range of the entire 2020s decade, compression of the P/E ratio with reflation, and a bias toward Value stocks," Bannister said.
