XLK - Stifel boosts S&P target predicts sharp drop in inflation

2023-05-08 11:29:19 ET

In light of the recent stock market rally, Stifel is boosting its S&P 500 target for the year while also predicting a substantial drop in inflation.

Stifel boosted its median S&P 500 ( SP500 ) ( NYSEARCA: SPY ) ( IVV ) ( VOO ) forecast to 4,400 from 4,200. That's about 6% above where the benchmark index is currently trading. The closing S&P low at the start of the rally was 3,577.

We "prefer Cyclical over Defensive stocks led by Cyclical Growth and Cyclical Value," Chief Equity Strategist Barry B. Bannister wrote in a note.

"There are encouraging signs of economic resilience in mid-2023, which is historically favorable for Cyclical positioning rather than a Defensive posture," Bannister said.

Stifel defines Cyclical Growth as Median & Entertainment ( PBS ), Software & Services ( IGV ) ( PSJ ) ( XSW ), Semiconductors and Semi Equipment ( SOXX ) ( SMH ), Technology Hardware and Equipment (Apple dominated) ( XLK ) ( VGT ), Retailers (Amazon dominated) ( XRT ) ( RTH ), Autos and Components (Tesla dominated) ( FDRV ), Durables ( XLY ) and Apparel.

It defines Cyclical Value as Basic Materials ( XLB ), Capital Goods, Banks ( KBE ) ( KRE ) ( KBWR ) ( KBWB ), Transportation ( IYT ) ( XTN ) , Diversified Financials, Real Estate ( XLRE ) ( FREL ) and Insurance ( KIE ) ( IAK ).

"We also forecast inflation to slow sharply, but not to the too-low range of 1-2% which existed in 2009-19, itself a disinflationary anomaly," Bannister said. "As inflation normalizes (e.g., the post-World War 2 average for y/y headline CPI has been 3.7%, a sign of better balance between fiscal and monetary factors) that is also positive for Cyclicals over Defensives."

"Extreme stimulus since 2020 (Fiscal and Fed) due to COVID-19 and 2020 election politics has shredded the concept of what market cycles 'should' look like, wrong-footing the bears in the past few quarters, but a more balanced fiscal and monetary consensus should emerge," he added. "On the risk of a recession and bear market, we observe that those are historically surprises and not so universally anticipated as they are now. Based on our views, it is only by late-2023 that we will become more concerned."

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