- Credit Suisse bumped its S&P 500 year-end price target by 16% to 4,700 on Wednesday.
- Strategists at the firm had previously expected the S&P 500 to finish 2023 at just 4,050.
- The bullish upgrade comes as a rally in stocks defies many skeptics who expected the bear market of 2022 to continue.
The stock market's 20% rally this year has prompted some Wall Street strategists to reevaluate their outlook for the S&P 500 and boost their price targets.
Credit Suisse is the latest firm to reassess as the benchmark index continues its blistering rally into the dog days of summer.
A team of analysts led by Jonathan Golub increased their year-end S&P 500 price target by 16% to 4,700 from an initial target of 4,050. An increase to the new price target suggests potential upside of 3% from current levels. The S&P 500 hit a new 52-week high of 4,578 on Wednesday.
The Credit Suisse team said in a Wednesday note that because of ongoing improvements in the economy, a declining likelihood that a recession is imminent, and strong positive earnings revisions for some of the largest technology companies, the strong rally in stocks is justified.
That might be a wakeup call to lingering bears like Morgan Stanley's Mike Wilson, who expected the bear market of 2022 to spill over into this year.
"Job openings remain abundant, which is inconsistent with a recession in the near term," Credit Suisse said. "The pace of firings (weekly jobless claims) is inconsistent with a recession."
And the gains could continue into 2024 as profits from the technology sector are expected to drive meaningful growth, according to the note. The expected jump in corporate earnings, combined with stock buybacks, drove Credit Suisse to increase its S&P 500 EPS estimates to $220 for 2023 and $237 for 2024. Prior estimates were $215 and $220 in 2023 and 2024, respectively.
While Credit Suisse observed that market valuations remain high compared to historical levels, they appear more reasonable when compared to current bond yields. The high valuations also suggests that investors will likely rotate out of mega-cap tech stocks that have driven most of this year's gains and into other areas of the market.
The forward price-to-earnings ratio for the mega-cap eight stocks is 31.2x, compared to just 16.7x for the rest of the market, according to data from Ed Yardeni.
There could be more upside to Credit Suisse's newly established S&P 500 price target if a more rapid decline in inflation sparks the Federal Reserve to turn more dovish and loosen up on monetary policy. On the flipside, if the economy takes a turn for the worse due to a slowing China economy, combined with elevated valuations, the stock market could start to trend lower, Credit Suisse said.