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The stock market is poised for a 9% relief rally this summer as the economy avoids a recession, according to Stifel.
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The firm sees oil prices falling to as low as $75 per barrel, which will help cool down inflation.
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While Stifel sees a bullish set-up in the stock market right now, it still expects a bearish decade ahead.
Investors should expect a sizable relief rally in US stocks this summer after the S&P 500 fell into bear market territory earlier this year on rising inflation and slowing earnings growth expectations.
That’s according to a Sunday note from Stifel’s chief equity strategist Barry Bannister, who expects the S&P 500 to jump at least 9% to 4,200 this summer. The relief rally will come to fruition if the economy avoids a recession over the next six to nine months, as Bannister expects.
“Recession fear is over-done,” he said, adding that the key indicator to monitor for recession risk is the PMI manufacturing index. “Recession question is whether we see PMI manufacturing closer to 40 than 50; our view is only a second half of 2022 slowdown at 50.”
The PMI manufacturing index is based on a survey that helps assess the economic activity of manufacturing companies. A reading of 50 is neutral, and anything above that signals ongoing growth in manufacturing activity.
Stifel’s view that a recession isn’t imminent doesn’t sound like a stretch given that the US economy has added nearly 3 million jobs year-to-date and the unemployment rate remains below 4%. The job market tends to shows signs of deterioration leading up to an economic recession.
And with no economic recession ahead, that means the earnings power of the S&P 500 is likely to hold up better than investors expect, which should provide some valuation support for the index and its individual components.
Also helping drive a rebound in stock prices this summer will be a precipitous decline in oil prices, which should ultimately help cool down rising inflation and give the Federal Reserve more breathing room in the trajectory of its interest rate hikes.
That would be a big relief for investors, who digested another high inflation report last week with prices rising more than 9% in June, a 41-year record.
Bannister expects oil prices to fall to as low as $75 per barrel, which represents a potential decline of 24% from current levels. Oil prices have been on the decline since its early March peak of about $130 per barrel, but are still about double the levels seen throughout most of 2015 though 2020.
To position for the upcoming rally in stocks, he recommends investors rotate out of defensive stocks and into cyclical growth stocks, often found in the software, semiconductors, media and entertainment, technology hardware and retail sectors.
While Bannister expects a rally in the short-term, he still thinks investors are poised to experience a lot of sideways chop, with a potential “lost decade” ahead. But that type of trading activity can present big opportunities for traders.
“Although we believe a secular bear market began in 2022, those feature trading opportunities for a decade, such as the one we now see,” Bannister said.
