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S&P 500 is likely to shift its direction in the coming days and likely correct 10% in the coming 3 to 6 months, Wells Fargo equity analysts told clients in today’s note.

S&P 500 Futures are trading modestly higher in pre-market Tuesday and “within spitting distance of our 4200 SPX target,” say the analysts.

Wells Fargo economists expect the U.S. to enter a recession in the second half of this year.

“We are maintaining our 2023 SPX price target of 4200, but believe the risk/reward over the next six months is skewed to the downside. Over the next 3-6 months, we expect to see a 10% correction, with the SPX trading down to 3700,” the analysts added.

They believe several factors will trigger the downside in equities, namely: 1) aggressive monetary policy; (2) potential capital/liquidity issues catalyzed by the bank crisis; and (3) a consumer that is increasingly reliant upon credit to sustain spending.

“In this economic downturn we believe S&P500 net margins will contract by a little over 100bps y/y after a tremendous postpandemic run.”

Wells Fargo’s lower view of 2023E SPX net margin (11.2% vs prior 11.6%) is reflected in the slashed 2023 S&P 500 EPS estimate to $200 from the prior $210. For 2024, WF expects the S&P 500 to earn $213.

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