Stifel raises S&P 500 target on falling inflation expectations, says buy cyclical stocks

Published Mon, May 8 202311:30 AM EDT

Stifel just got more bullish on where stocks will land at the halfway point of 2023, and encouraged investors buy cyclical stocks. The firm's strategist Barry Bannister hiked his second- and third-quarter S & P 500 target price to 4,400, a 5% increase from his previously held outlook of 4,200, a Sunday note showed. Bannister cited a resilient macroeconomic backdrop, as well as signs of easing inflation, for his forecast, and highlighted his continued preference for cyclical stocks over defensive ones. "There are encouraging signs of economic resilience in mid-2023, which is historically favorable for Cyclical positioning rather than a Defensive posture," Bannister said. "We also forecast inflation to slow sharply, but not to the too-low range of 1-2% which existed in 2009-19, itself a disinflationary anomaly." The strategist expects a year-over-year headline CPI of 3.7%, which is the average after World War II, saying it could be a "sign of better balance between fiscal and monetary factors." In March, the consumer price index was lower than expected, up 5% from the year-ago period. To be sure, recessionary concerns remain. However, the strategist expects investors will not have to worry about a downturn until later down the road. "On the risk of a recession and bear market, we observe that those are historically surprises and not so universally anticipated as they are now. Based on our views, it is only by late-2023 that we will become more concerned," Bannister wrote. Given this, Bannister said he's been bullish on cyclical growth and value stocks since October. He said cyclical growth stocks in media and entertainment, software and services, semiconductors and semiconductor equipment, technology hardware and equipment, retailing, autos and durables have "further to rally" in an environment of easing inflation and no recession in the near term. Meanwhile, he expects cyclical value stocks in basic materials, capital goods, banks, transportation and others that took a hit during the regional banking crisis are "oversold" if the economy continues to hold up. He said defensive value stocks are "last year's story," while defensive growth stocks will benefit when the U.S. reaches a recession.