The Stock Rally Won’t Resume Any Time Soon. Here’s Why.

Bannister extended his 4,400 target for the S&P 500 to April 2024 from the end of the year in a new note Monday, writing that stocks will remain pressured due to high interest rates. That’s less than 4% above where the index trades today.

With yields on the 10-year T-note flirting with 5%, many investors feel that it makes more sense to opt for virtually risk-free U.S. government debt rather than buy stocks, even though that bet is likely to pay off longer term. In other words, a bird in the hand is worth two in the bush.

In fact, high interest rates seem incompatible with the S&P 500’s valuation, which has been pushed up by the Magnificent Seven Big Tech stocks—Apple (ticker: AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA). Higher interest rates provide investors with returns today, making stocks’ future earnings less valuable.

Per Apollo Global Management chief economist Torsten Sløk, “tech valuations are very high, and inconsistent with the significant rise in long-term interest rates.”

Bannister is much of the same mind as other market strategists that have highlighted the problem. While he thinks that yields on 10-year Treasuries will peak around 5% this cycle, he thinks 5% to 6% will be relatively normal this decade, which will naturally act as a drag on stock valuations.

Bannister’s predictions have largely been borne out this year. In January he wrote that 2023 would be a year of two halves, in which a first-half rally would be followed by trouble. He set his 4,400 year-end target for the S&P 500 in May, highlighting the power of tech stocks.

Bulls have pointed to ongoing strength in the labor market as evidence that the economy is still humming, and fodder for the rally. However, as plenty of Federal Reserve watches noted after Chairman Jerome Powell’s remarks last week, the central bank doesn’t appear inclined to let rates fall. As Sevens Reports Tom Essaye put it, “the main takeaway from Powell’s speech was that in this situation, there’s no way the Fed can get dovish.”

Therefore, as Bannister writes, good news will remain bad news, as a “tight labor is a source of economic resilience but also a reason for Fed rate normalization which tightens U.S. Financial Conditions and weighs on price-to-earnings ratios.”

Of course if higher rates are bound to weigh on stocks, and Bannister believes they’re the new normal, the obvious conclusion is that the market has a tougher road ahead. Indeed, he concludes that “the 2020s decade is likely flat / widely rangebound for the S&P 500.”

In fact, he estimates that in the 2020s, the S&P 500 earnings per share will at least double from $156 in 2019 (pre-Covid) to $300 to $325 in 2030; however he expects that the index’s price/earnings multiple will roughly halve, keeping the index flat.

So although stocks may be able to make a move come spring, it’s not necessarily a return to boom times.

A scary thought for spooky season.

Write to Teresa Rivas at [email protected]