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Piper Sandler strategist Craig Johnson believes that the S&P 500 is on the cusp of a significant rally, with signs indicating that stocks are currently oversold. Johnson maintains his price target of 4,850 for the benchmark stock index, which implies a substantial 14% increase in stock value by the end of 2023. This optimistic outlook comes despite various challenges affecting the market, including high-interest rates, elevated oil prices, and geopolitical uncertainties.
Johnson highlights the resilience of stocks in the face of an array of macroeconomic headwinds. The S&P 500 is only 8% below its 52-week high of 4,607, showcasing its ability to weather the challenges.
Several technical indicators point to an overly bearish sentiment among investors. For instance, the breadth of the S&P 500, which measures the performance of winning stocks in the benchmark index, has deteriorated considerably. Johnson notes, “We’re already seeing this market fairly oversold on some overbought-oversold oscillators.”
Additionally, contrarian buy signals have emerged in recent weeks as stocks have continued to decline. Bank of America’s Bull and Bear Indicator has entered “extreme bearish” territory, a potential sign that investors should consider buying equities. The stock market’s volatility gauge, as seen with futures for the CBOE Volatility Index, has surpassed a key threshold of 20, suggesting that stocks may be poised for an upturn.
Despite concerns related to surging bond yields and fears of sustained higher interest rates, Johnson believes that the market has already undergone a significant selloff. He anticipates a substantial rebound once there is more clarity on developments in Washington and after the earnings season concludes.
Investors are largely expecting the Federal Reserve to halt its interest rate hikes, potentially leading to a decrease in bond yields. According to the CME FedWatch tool, there is a 98% likelihood that rates will remain unchanged at the Fed’s November policy meeting.
Furthermore, strong financial results have been reported by firms that have already disclosed their earnings. Of the 17% of S&P 500 companies that have released results, 73% have exceeded earnings per share estimates, based on FactSet data.
In summary, despite existing economic challenges, technical indicators and market resilience suggest that the S&P 500 may be on the verge of a significant rally, providing potential opportunities for investors.
