The Tell: ‘Cyclical growth’ could lead 10% ‘relief rally’ for S&P 500 this summer, says Stifel’s Barry Bannister

The beaten down U.S. stock market is poised for a ‘relief rally’ this summer, with the S&P 500 potentially climbing 10%, according to Barry Bannister, chief equity strategist at Stifel.

“We see a relief rally led by cyclical growth (mostly technology) to 4,150 for the S&P 500” this summer as oil prices decline and the market looks ahead to a possible pause in interest rate hikes by the Federal Reserve at its December meeting, Bannister said in a Stifel note dated June 23.

The S&P 500

was trading up more than 2% Friday afternoon at around 3,888, and heading for a weekly gain of more than 5%, FactSet data show, at last check. Earlier this month the index entered a bear market, defined as a drop of at least 20% from a recent peak, according to Dow Jones Market Data.

Investors have been anxious about the Fed becoming more aggressive hiking its benchmark interest rate in an effort to tame surging inflation. The fear is that raising rates too much too fast could trigger a recession in the U.S. 

“The S&P 500 has removed all COVID froth, but we see no U.S. recession in six months and a summer rally,” Bannister said. “Unless an investor sees a recession soon,” he said, “S&P 500 cyclicals relative to defensives appear oversold.”

“An issue with selling cyclicals to buy defensives,” done on fears of an economic contraction, is that “everyone else did so,” according to the note. 

Cyclicals include basic materials, capital goods, transportation, autos, durables and apparel, retail, energy, banks, insurance, diversified financials, software, technology hardware, semiconductors, and media and entertainment, the note shows. 

Read: Don’t trust the stock-market bounce until S&P 500 is back above 3,800: analysts

Bannister sees the PMI manufacturing index falling to “a low-50s level soon,” indicating slower growth in gross domestic product, but not a recession in 2022, according to the note.

As for the soaring cost of living, Stifel predicts that core inflation, as measured by the personal-consumption-expenditures price index, will slow to “the Fed’s view of 2.7% by 2023.”  Bannister expects such a decline in core PCE may prompt a pause in Fed rates hikes in December.

The “Fed’s task is tighter policy to lower inflation without a recession,” he said. “The Fed may also be aware that pushing short-term real rates toward the neutral rate has always created financial crises.”


Meanwhile, oil prices

have recently come down, though West Texas Intermediate crude for August delivery

was trading up more than 2% Friday afternoon at around $106.55 a barrel. That compares with around $120 a barrel earlier this month. 

“There are no straight lines on Wall Street and we believe this stock market is looking for good news on inflation, and that’s oil,” said Bannister. He expects oil prices to fall to around $85 a barrel by December, saying he anticipates a “cease-fire” in the Russia-Ukraine war as the cost to the West has become “untenable” as GDP slows amid high inflation.

“The weak political position of most Western leaders juxtaposed with time more on the side of Russia (for now) increases the likelihood, in our view, that the West “persuades” Ukraine to agree to a cease-fire,” he wrote.

Read: Inflation seen restraining Biden, other G-7 leaders as they consider more Russia sanctions at summit

Meanwhile, JPMorgan Chase & Co. strategist Mark Kolanovic said in a note Friday that the monthly and quarterly rebalancing of portfolios next week could push the stock market up around 7%, at a time when it’s “oversold’ while cash balances are near record levels. 

He pointed to the last monthly rebalance, saying the market saw a “significant rally” of around 7% going into the end of May, after being down 10%. And near the end of the first quarter, the market similarly rallied about 7%, he said.

“This year the impact of rebalances have been significant due to large market moves and low liquidity,” Kolanovic wrote. “Of course, rebalances are not the only drivers and the estimated move is assuming ‘all else equal.’”

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