In a Tuesday note to clients, Wolfe Research strategists have revised their base case scenario, now anticipating a "no landing" outcome for the U.S. economy, signaling an optimistic outlook.
The broker predicts real U.S. GDP growth to exceed 2% year-over-year in 2024, with inflation trends remaining above 2.5%. This shift reflects stronger-than-expected economic resilience, suggesting sustained growth rather than a downturn or stagnation.
Key factors influencing this outlook include the Federal Reserve's policy directions, inflationary trends, and the performance of key economic sectors.
“The economy has come in much stronger than expected over the past three months,” strategists said in the note.
“Despite rapidly rising GDP expectations and recent upside inflation surprises, Fed Chair Powell
still appears determined to cut three to four times this year,” they added.
The strategists believe the Fed is willing to let the US economy "run hot," suggesting a scenario where growth persists alongside higher-than-ideal inflation rates.
“Ultimately, we believe inflation will prove to be stickier than consensus expects, but don’t think
markets will worry about this until at least ‘2H and perhaps longer,” they wrote.
“Rising breakevens and the recent spike in gold suggest that the market doesn’t expect the Fed to get inflation back to 2% anytime soon.”
Moreover, the strategists have increased their year-end S&P 500 price target for 2024 to 5,300, based on a 20x multiple of their 2025 Operating Earnings Per Share (EPS) forecast of $265.
They have also revised their Operating EPS forecasts upward to $245 for 2024 and $265 for 2025, compared to the consensus estimates of $244 and $277, respectively.
Their base case scenario, referred to as "no landing," anticipates that market valuations will remain buoyant, supported by the Federal Reserve's dovish stance. Wolfe expects Price-to-Earnings (P/E) ratios to remain stable through the end of the year, mirroring the trends observed in 2021.
“We expect EPS revisions to remain the key driver of sector and subsector rotation as long as our “no landing” base case remains intact,” the note says.
When it comes to market breadth, Wolfe Research analysts suggest that a notable narrowing could indicate a major bullish or bearish turn, reminiscent of past market cycles.
As the market broadens out, the analysts predict that overlooked cyclical sectors, such as certain industrials and semiconductor companies, will excel. Moreover, they foresee small-cap stocks outperforming, driven by a strong growth outlook and positive leading indicators.