Will the stock market rally last? Analysts share their predictions — and strategies

Published Wed, Feb 8 20237:25 PM EST

The tide seems to have turned since 2022 — markets have been rallying since the start of the year. But investors are wondering how long that will last. Stocks rallied after U.S. Federal Reserve Chairman Jerome Powell said the disinflationary process has started . And all three major Wall Street indexes finished the day up on Tuesday despite his warning that more interest rate hikes are still likely. But is this just a bear market rally or the start of a bull market ? Analysts are divided. Here's what the pros have to say. Can this rally last? The rally has some way to go, said Trivariate Research analysts, led by founder Adam Parker, in a Feb. 5 note. While the current view is that "more of the Fed's hawkishness is behind us than in front of us," the research firm cited recent reports showing that hedge fund net exposures to U.S. stocks are lower than to European or Asian ones. "It means there is further upside potential to this rally," Parker wrote. Noting how much the S & P 500 and Nasdaq have jumped since the start of the year, he added, "it always feels like you must participate pro rata when the market is up." The S & P 500 has jumped over 8% in the year to date, while the Nasdaq is up more than 15%. Parker said a "strong rally" until April is "not out of the realm of possibility." "As one investor who is not off to a strong start year-to-date said to us on Friday – now there really aren't that many obvious negative catalysts for a while – so this can last," he said. Jay Hatfield, chief investment officer at investment firm Infracap, shares that optimism. Predicting that the Fed will pause rate hikes after the May meeting, he said "the rapid decline in inflation and the Fed pause will be a huge positive for the stock and bond markets." The S & P 500 could hit 4,500 by the end of the year, he added — that represents about 8% potential upside from Tuesday's close. He also highlighted the fall in energy prices, which he told CNBC earlier this week will "bleed through to core CPI and [Personal Consumption Expenditures Price Index] over the next few quarters." But markets could go through some range-bound trading before a "big rally," Hatfield told CNBC Pro. "We believe that we may be range bound after this big rally and before the Fed pauses," he said. "We believe that there could be a lot of resistance for the market at the 4,200 level as we have come very far, very fast." Not everyone is optimistic, however. Hedge fund manager Dan Niles told CNBC last week that he expects stock markets to fall by the middle of this year — given a "disconnect" between market expectations and the U.S. central bank's messaging. How to position Parker said investors can beat the market in two ways. First, buy growth stocks "that are not loved that can grow their gross profits even in this backdrop." Growth stocks such as tech were deep in negative territory last year, though many have bounced back at the start of this year. "With the huge rally in semis and the likelihood of 15% or more downward earnings revisions, today is the day we would buy a basket of midcap software over semis," he said, adding that there will be continued investment in software as companies chase productivity. Hatfield added that, given his prediction that stocks could stay range-bound before the Fed pauses, he's recommending that investors focus on dividend stocks that sold off significantly last year. Dividend stocks generally have stable earnings and a track record of distributing a portion of them regularly. They are generally more defensive in an uncertain market. In light of the volatile market, Niles said investors should continue staying invested in cash — his "favorite investment" for this year. — CNBC's Michael Bloom contributed to this report.