Between strong, AI-driven earnings and favorable historical trends in midterm election years, Wall Street strategists see tailwinds for stocks heading into year-end, even as bond yields hang near 24-year highs.
“The path of least resistance into year-end is higher,” Truist chief investment officer Keith Lerner said.
Wall Street expects S&P 500 (^GSPC) earnings to jump 30% year over year, with major banks set to kick off what could be a blockbuster quarterly reporting season.
Bubbling worries over the AI trade, including the risk of a slower pace or spending, have weighed on tech valuations. The Technology sector (XLK) now trades at a price-to-earnings ratio of around 21, down from roughly 35 at this time last year, Lerner noted.
“You also have this reset in the market and valuations, and sentiment that also suggests that we could see some upside before year-end,” he said.
198.78 +1.00 (+0.51%)
At close: October 9 at 4:00:00 PM EDT
198.80 +0.02 (+0.01%)
After hours: October 9 at 7:58:08 PM EDT
XLK ^GSPC
History is also on the side of a rally as the midterms approach. The fourth quarter has been positive for the S&P 500 about 84% of the time during midterm election years, and the average gain is about 7%
“The one outlier was 2018, and that should raise a little bit of a flag because that’s when the Fed was also raising rates, or there was concern they were going to be too tight,” Lerner said.
That doesn’t mean strategists aren’t factoring the impact of high rates into their year-end forecasts.
Last month, Yardeni Research lowered its year-end S&P 500 price target to 7,900, citing rising bond yields. The revised target implies just over 1% upside from current levels.
Wall Street now expects the Fed to hold rates steady at its October meeting, after voting unanimously on a quarter-point hike in September.
Meanwhile, stocks have been jittery in recent sessions, and the breadth of the rally has narrowed.
On Friday, stocks recovered from a drawdown after a Bloomberg report that OpenAI (OPAI.PVT) expects to reach or exceed $70 billion in annualized revenue by the end of the year, helping quell worries that the AI boom was running out of steam.
“Things are accelerating. So to me, these are buying opportunities, not the time to be skittish,” Dan Ives, Yorkville Ives partner and senior managing director, told Yahoo Finance last week.
“We’re in the third inning of the AI revolution,” he added.
UBS analysts also pointed to growing AI demand in their recommendations for investors, but suggested approaching it through a diversified portfolio.
“We recommend a diversified approach to tech, favoring high-quality semiconductor and hardware beneficiaries of AI spending, megacap platforms, and defensive tech firms,” UBS chief investment officer of the Americas Ulrike Hoffmann-Burchardi said.
Ines Ferre is a senior business reporter for Yahoo Finance.
Click here for an in-depth analysis of the latest stock market news and events moving stock prices
Read the latest financial and business news from Yahoo Finance
