Wall Street experts are split into two camps -- with some who believe a bull market is right on the horizon.
The stock market's recent increases have been fueled by gains from tech and artificial intelligence stocks.
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Wells Fargo Investment Institute has a dimmer view. They forecast the S&P 500 will decline and reach 4,000 to 4,200 by the end of the year and rebound in 2024 to reach 4,600 to 4,800.
“Protecting capital during more challenging times is often as important, or more important, than growing capital,” said Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management. “There will come a time to turn more opportunistic in positioning portfolios for a recovery; however, we need to respect the signals and understand when the risk and reward dynamic changes.”
The recent rally has been boosted by AI stocks, but the increase in the S&P 500 will stop with a maximum gain of 100 to 150 points between now and Labor Day in September, wrote Bank of America strategist Michael Hartnett in a research report.
"We are not convinced we [are] at start of brand, new shiny bull market…still feels more like combo of 2000 or 2008, big rally before big collapse,” says Hartnett.
Last week the S&P 500 rose and achieved a 20% gain above the low in October. Wall Street experts have typically used this metric to determine the beginning of a bull market. Stocks declined slightly on Friday.
Economic Growth Slows Down
Wells Fargo expects the economy to contract -- they estimate GDP will only reach 1.1% by the end of 2023 and rise slightly to 1.5% for 2024.
The potential good news in the report is that they believe inflation will continue to decline and will dip to below 3% in 2023 and through 2024. The target inflation rate is 2.9% in 2023 and and 2.8% in 2024, the bank estimates.
Investors should pivot to increasing defensive stocks in their portfolios, said Wells Fargo, which has estimated that a moderate recession will occur in the second half of 2023 and into 2024 before a recovery happens later in the year.
Impact of Fed's Moves
Wells Fargo estimates that the Fed will increase interest rates one more time in 2023 before they start cutting them in 2024.
The anticipated federal funds rate in 2023 is between 5.25% to 5.50% and 3.75% to 4.00% in 2024.
In addition, company earnings will contract even more later in the year and a recession will "stall" revenue growth, Wells Fargo said.
Profits will improve in 2024, but earnings will not reach their 2022 peak until 2025, the bank estimates.
