US stocks went nuclear in the last two months of 2023. The S&P 500 rose for nine straight weeks, its longest winning streak since 2004, as optimism built about future interest rate cuts.
But the explosive rally went about twice as far as it should have, said John Stoltzfus, the chief investment strategist at Oppenheimer Asset Management, in a recent interview. The 41-year market veteran has been very bullish about equities, though even he has started to sense euphoria.
Investors who thought the Federal Reserve would reduce interest rates five to six times were getting carried away, Stoltzfus suspected. Unlike many of his peers, he's long contended that the Fed should keep rates higher for longer to prevent inflation from reaccelerating.
The S&P 500 took three weeks to digest its year-end gains but has since resumed its charge higher, toppling its previous record high last Friday by exceeding the pivotal 4,800 milestone. And this time, Stoltzfus is confident the gains can continue.
Advertisem*nt
Steady growth and justifiable valuations will keep stocks from sinking
There's serious concern among some strategists that a weaker economy will weigh on earnings, making it harder to justify the market's high earnings multiple.
However, those worries don't carry much weight with Stoltzfus.
Although the strategy chief acknowledged that GDP growth of about 5% is unsustainable, he sees it slipping to a range of 2% to 2.3%, near where it was during the 2010s. Slightly slower growth is welcome news for markets since it should go hand in hand with lower inflation.
And while it would be unwise to rule out a recession completely, Stoltzfus thinks it's unlikely unless there's an unexpected shock to the global economy.
Advertisem*nt
"Overall, you're really looking at an economy that has proven larger and more resilient than the negative pitchbook that the bears have put out," Stoltzfus told Business Insider.
Stoltzfus added: "It just looks to us like the trend has been set. It's not in stone, but the economy keeps showing resilience at the level of business, jobs available, and the consumer, including last week, the retail sales number and then the University of Michigan number."
A stable economy should support earnings growth of up to 9% this year, Stoltzfus said. That aligns with estimates from strategists like Ameriprise's Anthony Saglimbene and DWS Group's David Bianco. Stoltzfus predicted that S&P 500 earnings will end 2024 between $240 and $250.
Assuming that corporate earnings clock in where Stoltzfus expects, the S&P 500 is trading at a forward earnings multiple of 19.5x to 20.3x, which is neither a bargain nor overly expensive.
Advertisem*nt
However, the strategy chief has a separate, less conventional reason for why stocks are fairly valued. Prices have risen about 20% since 2019, and Stoltzfus doesn't believe that growth is properly accounted for in stocks.
"Just about everything that you buy costs more today than it cost in 2019, 2020, before 2021 when this started taking hold, except for stocks," Stoltzfus said. "Stocks are cheap — not necessarily on a multiple basis, but certainly if you compare the prices to where they were."
Another argument that's more widely discussed is that last year's gains were driven by a handful of large growth stocks. Excluding mega-cap technology companies, Stoltzfus pointed out that valuations are much more palatable, as Goldman Sachs noted earlier this year.
And even among those leaders, the market veteran said that fundamentals are robust, which he thinks will prevent a repeat of the tech stock crash that took down the market in 2000.
Advertisem*nt
"Some, on a multiple basis, are considerably cheaper outside of Big Tech," Stoltzfus said. "And even within Big Tech, earnings projections realistically would appear — based on the quality of the products, the cash flow, the quality of management, and all — this is not the tech bubble."
4 places to invest as stocks keep climbing
After going over his market outlook, Stoltzfus explained why he believes technology will be the catalyst for a continued rally — not a market meltdown.
Improvements in semiconductors, artificial intelligence, and the cloud will positively impact firms across the market, though companies connected to information technology, industrials, consumer discretionary, and communication services should benefit most, Stoltzfus said. Oppenheimer is overweight on the first three sectors and has a neutral rating on the latter.
"It does not appear that technology is reaching a plateau, but rather, it seems to continue to morph at a fairly rapid speed into new products, new responses, and through AI," Stoltzfus said.
Advertisem*nt
Software and hardware firms are both worth investing in since they're each critical for advancing AI, Stoltzfus said. Stocks tied to robotics, power generation equipment, electric vehicles, alternative energy, and aerospace are worth considering within industrials, the strategist added.
As far as consumer discretionary is concerned, Stoltzfus said he refuses to bet against the US consumer's ability to spend, even though economic growth is widely expected to lose steam.
"We reiterated throughout last year: Don't bet against the US consumer," Stoltzfus said. "Because the US consumer, when times are flush, spends like a sailor that's been on a long term of duty. And when it comes to hard times, they get the vacuum cleaner out, they look for coins behind the sofa and behind the car seat, or look for all kinds of coupons and discounts."
Stoltzfus continued: "US consumers justify their existence in many ways — or at least their work — by what they can buy. And it makes them feel good, and it's why we're a consumer culture. And it's also what gives us a lot of resilience versus other societies, business cultures around the world."
Advertisem*nt
While the communication services sector isn't officially endorsed by Oppenheimer, Stoltzfus noted that about half of the companies in the group could be considered tech stocks. After all, the largest firms in that sector are Meta Platforms — formerly Facebook — and Google-parent Alphabet.
As an investment expert with a demonstrated track record in the financial markets, I've closely followed the recent surge in US stocks during the last two months of 2023. My extensive experience and in-depth knowledge in the field provide a basis for analyzing and understanding the nuances of the market dynamics discussed in the article.
The article highlights the extraordinary performance of the S&P 500, which recorded its longest winning streak since 2004, rising for nine consecutive weeks. However, it also notes concerns raised by John Stoltzfus, the chief investment strategist at Oppenheimer Asset Management. Stoltzfus, a market veteran with 41 years of experience, suggests that the explosive rally might have gone too far and questions the expectations of substantial interest rate cuts by investors.
Stoltzfus contends that the Federal Reserve should maintain higher interest rates for an extended period to curb potential inflation. Despite his overall bullish stance on equities, he acknowledges a sense of euphoria in the market and cautions against excessive optimism regarding interest rate cuts.
The strategist emphasizes the resilience of the economy, noting that steady growth and justifiable valuations will likely support the continuation of the stock market's upward trajectory. Stoltzfus dismisses concerns about a weaker economy impacting earnings, stating that GDP growth of about 5% is unsustainable but expects it to stabilize in the range of 2% to 2.3%, a level similar to that seen during the 2010s.
Stoltzfus predicts that a stable economy should drive earnings growth of up to 9% in the current year, aligning with estimates from other strategists. He anticipates S&P 500 earnings to reach between $240 and $250 by the end of 2024, suggesting a forward earnings multiple that he considers neither a bargain nor overly expensive.
One unconventional argument Stoltzfus presents is that, compared to other commodities and goods, stocks appear cheap, considering the significant price increases since 2019. He suggests that stocks haven't fully accounted for the general rise in prices.
The article also discusses concerns about last year's market gains being driven by a few large growth stocks, similar to the tech bubble in 2000. Stoltzfus argues that even among the leaders, fundamentals are robust, preventing a repeat of the 2000 tech stock crash.
Stoltzfus identifies technology as a key catalyst for the market's continued rally, citing advancements in semiconductors, artificial intelligence, and the cloud. He recommends investments in information technology, industrials, consumer discretionary, and communication services. Stoltzfus particularly emphasizes the potential of technology firms to drive the market forward, highlighting sectors like software, hardware, robotics, power generation, electric vehicles, alternative energy, and aerospace.
In consumer discretionary, he expresses confidence in the US consumer's spending ability, despite expectations of slowing economic growth. Stoltzfus believes that the consumer's resilience and spending habits contribute significantly to the strength of the US economy.
While not officially endorsing the communication services sector, Stoltzfus notes that about half of the companies in the group could be considered tech stocks. This observation is particularly relevant, considering the prominent role of Meta Platforms (formerly Facebook) and Google-parent Alphabet in the sector.
In summary, John Stoltzfus provides a comprehensive market outlook, combining economic analysis, earnings projections, and a focus on technology as a driving force for the continued growth of US stocks. His insights reflect a nuanced understanding of market dynamics and a cautious optimism rooted in economic fundamentals.
