29 Jun Economic Outlook June 2023
Monetary Policy and Market Trends
The other week the FMOC held tight and did not raise rates though the “Dot Plot” (a survey of the members on their future outlook) surprised by signaling two more 25bp rate hikes before the end of the year. This shows that they have a Wait and See attitude but are ready for more tightening. CPI numbers have been slowing down though not quick enough. Fed Chair Powell even went so far to say that rate cuts may be several years out not seeing Inflation getting to 2% until 2025.
On the other hand…
Bullish S&P 500 Forecast Amid Rising Tech Giants and AI Adoption
Recently, Goldman Sachs has updated their S&P 500 year-end target from 4000 to 4500, which is a 5% increase from the current level of 4299. The S&P 500 index was up by 0.4% for the week when this forecast was announced. While the overall market performance has been impressive, it’s crucial to note the uneven performance of individual stocks.
The five largest firms in the S&P 500 – Apple, Microsoft, Amazon, Google, and Nvidia – have shown significant growth of 47% year-to-date, now representing 24% of the S&P 500’s market capitalization. Excluding these tech giants, the remaining 495 stocks in the index have returned only 5% this year.
Goldman Sachs’s EPS forecast for 2023 is optimistic, predicting $224 under a “soft landing” scenario. This estimation surpasses the consensus of $206. Furthermore, Goldman Sachs proposes a 25% chance of a recession in the next 12 months, considerably lower than the consensus prediction of 65%. These forecasts suggest a transition in the market’s focus from a few tech behemoths to a broader valuation adjustment, potentially driven by the benefits of AI applications.
Risks to the S&P 500 Outlook
Although the overall market outlook seems optimistic, the forecast doesn’t ignore the potential risks. A potential downturn in growth and persistent inflation could pose serious threats to the S&P 500. These issues could provoke a hawkish response from the Federal Reserve, which could significantly affect equity valuations. In a mild recession scenario, the S&P 500’s EPS could decline by 10% to $200. If inflation becomes a severe concern, expectations for a more aggressive policy rate path could negatively affect equity valuations.
A New Era of Productivity: AI in a Tight Labor Market
The combination of a tight labor market and advances in AI might lead to a new era of productivity in the U.S. Labor productivity growth has been sluggish in recent years; however, increasing wage pressures and a decreasing supply of skilled labor might prompt companies to invest more heavily in AI and other technologies to boost efficiency and lower costs.
AI’s role in boosting productivity could be global and significant, particularly helping non-tech sectors like retail and manufacturing. Companies who invest in new technologies and embrace transformation are more likely to emerge as winners in the productivity race, particularly in a less global world economy prompted by political tensions, an emphasis on energy security, and the effects of the COVID pandemic.
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