America’s most popular sport is finally back, promising to entertain leagues of fans yet again. However, while the football season is just kicking off, for stock traders, September feels more like the playoffs.
With only 78 trading days left in 2022, Wall Street’s brightest minds are still split on where the S&P will end the year — with live year-end S&P 500 price targets ranging from 52-week highs to 52-week lows. And by the end of September, we’ll likely have a clearer picture of who’s going to come out on top.
September Double-Header: CPI Report and FOMC
After Jerome Powell’s hawkish Jackson Hole warning, all eyes are on these two September events, which some analysts believe are likely to set the tone for the rest of 2022. While there will be additional FOMC meetings to come, the one scheduled on September 21st is the only one remaining where the market expects another 75 basis point rate hike. With the third quarter already flying by, Wall Street’s most bearish and bullish analysts have a lot of ground to cover if they want their predictions of double-digit S&P moves to come true by the end of the year. But they aren’t backing down: Here’s how bulls (and bears) think they’ll get there.
The Bull Case: Falling Inflation, Economic Resilience, and “Baked-In Bad-News”
CPI Reports are lagging indicators — meaning September’s CPI Report will reflect August inflation. This has some analysts, like Bull-Team-Captain Tom Lee doing the math. In a September sit-down with CNBC’s Scott Wapner, Lee told The Judge that the September CPI Report was likely to show inflation well-below expectations.
Tom Lee’s 2022 Predictions Thus Far:
- Predicted that the first half of the year would be “treacherous”.
- Predicted a summer bounce.
- Predicted that the summer bounce would take us back to a retest of $3,900, which would hold.
- Fundstrat’s official 2022 S&P 500 price target: $4,800 (+18%) — a return to the all-time high.
While a round-trip back to all-time highs may sound far-fetched, Tom Lee isn’t the only bull bold enough to make the call. JPMorgan’s Chief Economist Marko Kolanovic and BMO Capital Markets’ Chief Investment Strategist Brian Belski are both on board with matching $4,800 year-end S&P 500 price targets.
The “falling inflation”, positive CPI piece of the bull case: We know that one of the top drivers of high inflation has been the soaring price of gasoline. And we know that it fell dramatically throughout the month of August. While energy prices aren’t something that the Fed has direct control over, this can have a broadly positive effect on other key measures of inflation. For instance the price of food, retail goods, airfare, the cost of synthetic materials like plastics that are involved in petroleum and refining — and much, much more.
The “economic & consumer resilience” piece of the bull case: The cause-and-effect relationship between falling gas and the consumer extends far past decreasing inflation — it’s largely a tailwind for the broader economy. And consumers are already catching on. After three consecutive months of weakening consumer confidence, August 30th depicted a big bounce. Americans are “less pessimistic in both their current and future economic outlooks”, giving the most positive read on consumer confidence since May. What’s driving it? You guessed it: falling gas prices. Whilst analyzing the results of the most recent consumer confidence survey, one economist said,
“Expectations are more sensitive to movements in gas prices. We expect a further increase in September as the lagged effect of the drop in gas prices kicks in.”
A strengthening outlook on the economy mixed with falling inflation could indicate that the Fed’s path to a “soft landing” is less narrow than what the market has already priced-in. That note about what is and isn’t priced-in is the last important piece of the puzzle for bulls.
What’s “Priced-In” to the Market?
- The Fed Fund Futures market is pricing-in 80% odds of a 75 basis-point hike at the September FOMC meeting. If Powell was telling the truth when he said that the Fed would consider “the totality of the data” before making their decision about whether to hike 50 or 75 basis points, then a significant drop in inflation could set the stage for a dovish surprise.
- Despite a VIX reading that is running below average for the calendar year, bearish sentiment is at a fever pitch. Last week, Wall Street crowded into put options at the highest rate since 2008, racking up the highest total put premium in more than two decades. Whether this was outright bearish betting, or an influx of “catastrophe insurance”, one thing is for sure: investors have taken a highly bearish position. If the market starts to move higher, the high quantity of “cash on the sidelines” and the market’s lack of bullish positioning could create a stampede of positive momentum — at least, according to the bulls.
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The Bear Case: Recession, The Global Economic Slowdown, Earnings Projections and Valuations
Part of the bull case is that there’s a treasure-trove of capital waiting on the sidelines. However, if you listen to some of the strategists, analysts, and investment bankers who wield that capital, that money is on the sidelines for good reason — and they aren’t expecting to deploy it any time soon.
“Our economists officially are calling for a recession. And we’re not necessarily seeing supply chain, inflation, or other market risks alleviate as quickly as we were hoping.”
That was Savita Subramanian, managing director at Bank of America. Savita’s year-end S&P 500 price target (and by extension, Bank of America’s S&P 500 price target) is $3,600 — a drop of more than 11% from current levels. $3,600 would imply a return to the June 17th 52-week low. That may sound bad, but it’s nothing compared to the bearish call that Guggenheim CIO Scott Minerd made yesterday afternoon.
Since 1960, P/Es have trended lower when #inflation is higher. With YoY core PCE now at 4.6% and S&P500 trading at ~19x, we should see stocks fall another 20% by mid-October…if historical seasonals mean anything. pic.twitter.com/ZYOgxGXF5e
— Scott Minerd (@ScottMinerd) September 8, 2022
A 20% fall from the time that the above tweet was posted would bring the S&P 500 to 3,200 by mid-October — a stark warning from the Guggenheim CIO, but one backed by history. This follows the call made by Guggenheim on August 20th, where they predicted the S&P 500 could see new lows if it failed to break about its 200-day moving average. (Spoiler alert: It did fail.) Guggenheim specifically referenced 2008’s failure to break above the 200-DMA in their case for lower-lows:
“The S&P 500 went on to fall another 53 percent before bottoming in March 2009, bringing the peak-to-trough decline to 57 percent. Similarly, the bear market of 2000–2002 saw several failed breakout attempts that ultimately resulted in a peak-to-trough decline of 49 per cent.”
And while some feel $3,200 is absurd, one popular bearish analyst thinks that if the recession that Bank of America is calling for comes to fruition, we could be heading even lower. That bearish analyst is Mike Wilson, of Morgan Stanley. If Tom Lee is the MVP of Team-Bull, Mike Wilson is as good a fit as any to play his bearish counterpart. Mike has made several well-timed predictions in 2022, including a big bearish call back in January of this year where he said, “Winter is here for equities.”
While Mike Wilson’s base-case is for the S&P 500 to end the year at $3,900, he believes we have yet to see the bottom of 2022’s bear market, and in the event of a recession, Wilson thinks that bottom could be as low as $3,000 in the S&P 500. Part of his reasoning: A depreciation of earnings estimates. In 2023, earnings estimates currently stand at $244 dollars per share — 8% growth. That’s abnormally high when compared to tightening cycles of the past (which generally brought about earnings growth that came in close to flat).
Lastly, there’s the looming issue of the global economy. While Americans are finally seeing the cost of gas fall in August, the same can’t be said for Europe. Last Friday, Russian state-owned Gazprom shut down the Nord Stream pipeline, a key supply line to Germany. This has some worried that it could push the European economy, which is already in a tight spot, into a recession. The fear: A recession in Europe could lead to further depreciation in the earnings growth of American countries who rely on European revenue. Adding fuel to the global bear case: The fact that China, another key-piece of the earnings equation, is still imposing its zero-Covid lockdowns.
The Bottom Line: It’s Crunch Time
With the play clock winding down, both the bears and the bulls have their work cut out for them if they want the S&P 500 to reach their far-out price targets. However, each side lays out a great case, and it wouldn’t be the first steep rally or decline that we’ve seen in recent stock market history. Between March 29th and June 17th, the S&P 500 fell more than 21%. If a drop of the same caliber happened at these levels, the S&P 500 would be trading near $3,200 — a definitive touchdown for bears. Likewise, between June 17th and August 16th, the S&P 500 rallied 19% — more than it would take to reach all-time highs from here (within just two months.)
But if the S&P 500 is expected to get to either team’s end zone, it’ll need some help. Here to provide some market momentum:
The 8 biggest scheduled events left for the stock market in 2022:
- September 13th: CPI Report
- September 21st: FOMC Meeting
- October 13th: CPI Report
- October 14th: The final earnings season of 2022 commences, beginning with the big banks, followed by Tesla (10/19), and the FAANG complex in the following days.
- November 2nd: FOMC Meeting
- November 10th: CPI Report
- December 13th: CPI Report
- December 14th: FOMC Meeting
There’s a lot of ground left to cover, and not a lot of time — but September should be a good start.