The S&P 500 is poised for a 14% rally as stocks are flashing signs of being oversold, strategist says

• Stocks have room to rally 14% this year, according to Piper Sandler strategist Craig Johnson.
• Johnson pointed to various indicators that suggest the S&P 500 is oversold.

The S&P 500 is set up for a strong rally by the end of the year, as stocks are flashing signs of being oversold, according to Piper Sandler strategist Craig Johnson.

Johnson reiterated his price target of 4,850 for the benchmark stock index. That implies a 14% jump in stocks by the end of 2023, despite a slew of headwinds beating down on the market, like high interest rates, high oil prices, and geopolitical uncertainty.

But stocks have been fairly resilient when considering the array of macroeconomic headwinds the market is facing, Johnson said, with the S&P 500 only 8% down from its 52-week high of 4,607.

And there are a number of technical indicators that suggests investors are overly bearish on the market. For instance, S&P 500 breadth, a measure of winning stocks in the benchmark index, has largely deteriorated.

"We're already seeing this market fairly oversold on some overbought-oversold oscillators," Johnson said.

Other contrarian buy indicators have also flashed in markets in recent weeks as stocks continue to slide. Bank of America's Bull and Bear Indicator just entered "extreme bearish" territory, a possible sign that investors should start buying up equities, strategists said in a note last week.

Meanwhile, the stock market's volatility gauge is also flashing signs that stocks are in a trough, with futures for the CBOE Volatility Index surging past a key threshold of 20.

That could suggest more upside for stocks, despite the recent selloff stoked by surging bond yields and fears of higher-for-longer interest rates in the economy.

"You're getting a lot of the bad stuff out of the way. The market is already sold off to a degree here. But I think once we get some clarity brought into what's going to happen in Washington, get through the earnings seasons, these kinds of things, I think there's a real meaningful pop," Johnson said. "And we still think there's still decent upside to go here."

Markets are largely expecting to Federal Reserve to be done with their interest rate hikes, which could encourage bond yields to ease. Investors are pricing in a 98% chance rates will be kept level at the Fed's November policy meeting, according to the CME FedWatch tool.

And while investors are still waiting on the bulk of S&P 500 earnings, financials for firms that have already reported look strong. Of the 17% of S&P 500 firms that have reported results, 73% have exceeded estimates of earnings per share, according to FactSet data.