Wall Street strategists get more bullish as stocks go higher: Morning Brief

Myles Udland

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For the second time in as many weeks, a prominent Wall Street strategist has raised their 2023 price target for the S&P 500.

In a note to clients on Tuesday, Lori Calvasina and the equity strategy team at RBC Capital Markets raised their year-end price target on the benchmark index to 4,250 from 4,100. Last week, Savita Subramanian and the equity strategy team at Bank of America Global Research raised their price target on the index to 4,300 from 4,000.

On Tuesday, the S&P 500 closed at 4,205.52; the index has gained 10% so far this year.

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In raising their forecasts for the stock market this year both strategists cited a number of factors.

Calvasina's work takes in the output of six key models that span earnings, sentiment, and political factors among others. Subramanian's team uses five indicators for their model.

Both firms also offer a range of outcomes for the S&P 500, with RBC presenting a bear case (3,800), a base case (4,250), and a bull case (4,600) for the index. BofA has a similar framework, with its five model outputs ranging from 3,911 to 4,599 for the index by year-end.

But the work from both firms also offers investors with another reminder that there is, in the end, one key force pushing stock prices higher or lower over time — earnings.

With 97% of the S&P 500 having reported first quarter results through last Friday, earnings for the index were down 2.1% from the same quarter last year, data from FactSet showed. At the start of first quarter earnings season, the S&P 500 was set to see earnings fall 6.8% from last year. This 2.1% decline, then, marks a massive improvement.

Investors are rarely interested in what has happened or what is happening as much as they focus on what will happen. And though first quarter earnings confirmed the "earnings recession" we'd argued would be the headline theme of the period, this "recession" is not moving markets.

Calvasina now sees the S&P 500 earnings at $213 per share in profit this year, up from $200. Subramanian sees earnings at $210 per share against a prior forecast for $200. A positive change in the future rate of change for profits results in higher stock prices today.

Add to this the enthusiasm for AI's possibilities and this "better than feared" earnings downturn has bolstered investor confidence in the market.

Both Calvasina and Subramanian make references to AI in their outlooks.

Calvasina writes that AI "provides a new, long-term secular growth story at a time when economic growth is expected to stay weak." Subramanian notes, "Corporate America has shifted [its] focus to structural benefits — efficiency/automation/AI and have bought themselves time to adapt via long-dated fixed rate debt."

But whether AI and its related efficiencies pushes corporate profits higher in the years ahead or not doesn't matter, necessarily.

All that matters is investors see the decline in earnings turning back to growth sooner than feared.

The price of any stock is a reflection of the net present value of the company's future cash flows. Investors are forever haggling over what price to pay today in exchange for earnings and dividends tomorrow.

And the market today isn't sending any mixed messages about its answer to that question.

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