Macro

Market Downturn Meets Earnings Hope: S&P Targets 5700

Market Wavers on Inflation Fears, Eyes Earnings for Turnaround; S&P 500 Resilient with Citigroup's 5700 Target

By Bill Bullington

4/13, 11:37 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Citigroup, Inc.
JP Morgan Chase & Co.
UBS Group AG Registered
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Key Takeaway

  • Despite recent market downturns due to inflation concerns, strong Q1 earnings could potentially reverse the trend.
  • Citigroup and UBS maintain optimistic market outlooks, with S&P 500 targets of 5700 and 5200 respectively, driven by solid earnings growth.
  • A broadening growth beyond the "Magnificent 7" stocks suggests a healthier market poised for gains if inflation eases or earnings exceed expectations.

Inflation Concerns and Earnings Optimism

The past week in the markets was marked by a mix of apprehension and optimism. Investors were initially rattled by March's inflation data, which came in higher than expected, dampening hopes for imminent interest rate cuts. However, the onset of the earnings season brought a renewed sense of optimism. The S&P 500, despite these challenges, has shown resilience, buoyed by the anticipation of strong first-quarter results from corporations. Citigroup U.S. equity strategist Scott Chronert highlighted the risk of corporate guidance falling short of high growth expectations but maintained a healthy outlook for the fundamental picture.

Earnings Season Underway

The earnings season began with a focus on whether companies can surpass the high expectations set against a backdrop of falling inflation and stable economic growth. Early reports from banks have been a mixed bag, with JPMorgan Chase among those experiencing a dip in share prices following their earnings release. Yet, the broader sentiment remains hopeful, with Chronert suggesting that positive surprises during the earnings season could present buying opportunities. Both Citigroup and UBS have maintained their bullish outlooks for the S&P 500, with Citigroup's target for the index at 5700 and UBS expecting full-year earnings to hit $245 a share.

Broadening Growth and Rate Cut Speculations

David Lefkowitz of UBS highlighted the broadening of growth beyond the "Magnificent 7" stocks, indicating a more widespread recovery across sectors. This optimism is supported by strong labor market and manufacturing data, suggesting a solid economic backdrop. Despite the rocky start to the second quarter, there's a belief that the stock market can regain its momentum, driven by solid earnings growth, potential Federal Reserve rate cuts, and investment in AI. Lefkowitz's base case sees the S&P 500 ending the year around 5200, with an upside scenario of 5500 if inflation improves significantly or earnings exceed expectations.

Street Views

  • Scott Chronert, Citigroup (Neutral on the market):

    "While very early, the first set of first-quarter reports from the banks highlights this risk of guidance falling short of lofty implied growth expectations, even as the overall fundamental picture remains healthy." "A buying opportunity may present as we progress through the reporting period if we see consistent positive surprises followed up with a rightsizing of market implied growth expectations."

  • David Lefkowitz, UBS (Bullish on S&P 500):

    "Growth is starting to broaden out with non-Magnificent 7 stocks poised to generate positive, albeit modest, growth for the first time since the fourth quarter of 2022. This trend should accelerate over the balance of the year." "The environment remains supportive driven by solid earnings growth, likely Fed rate cuts, and surging investment in AI... In our base case, we expect the S&P 500 to end the year around 5200."