Wall Street pros see the S&P 500 rallying further — and reveal how best to play it

Published Tue, Jun 6 20238:05 PM EDT

The S & P 500 is going from strength to strength this year, closing at a one-year high last Friday and up over 10% year-to-date. While many analysts have cautioned that the rally could be a narrow-based one, with gains driven by just a few major tech stocks, some Wall Street pros are expecting the S & P 500 to rally further. Evercore ISI's Julian Emanuel told CNBC's "Squawk Box Asia" on Tuesday that he has raised his S & P 500 price target from 4,150 to 4,450 . That represents a 4% increase from Monday's close of 4,273.79. He said the index could reach that target by July 4. The senior managing director for equity, derivatives and quantitative strategy listed three factors he says are "favorable for further rally." These are: the pandemic stimulus "stock of money" which continues to be supportive; better-than-expected earnings and margins with tailwinds that include cost-cutting; and the artificial intelligence trend. Emanuel said that the AI buzz driving stocks has turned into a so-called "momentum market" like the Internet-related rally of the late 1990s to 2000. "The Momentum broadened last week into the larger S & P 500 and importantly the Small Cap Russell 2000; this broadening is very positive and looks set to continue," he wrote in notes sent to CNBC. Brian Stutland, portfolio manager at Equity Armor Investments, said he would normally be concerned about a narrow rally being driven by only a handful of names. However, he's taking some reassurance from volatility indexes, with the VIX declining. "If there's going to be a bear market, if there's going to be some sort of recession and disconnect in the marketplace, we would see the markets rise and volatility starts to rise," Stutland told CNBC's "Street Signs Asia." "I don't think we're at the point where we've seen hedgers come into market, institutional order flow that would indicate 'hey, it's time to panic because we're gonna get a correction,'" he added. "It kind of feels like this market can continue to go and in fact, we're nearing basically a 20% level from lows of the markets last year that would indicate a bull market that we're entering. We're very close there." Paul Meeks, portfolio manager at Independent Solutions Wealth Management, has a differing view, however. He believes markets are set for at least a "modest correction." "Some investors have driven stocks up based on the false premise that rates will fall but I think that they'll either keep rising or they'll plateau here well into 2024. If I'm right, we'll probably have a correction. Stock prices are just too steep based on that misunderstanding," he told CNBC. He said the "biggest unsolved problem" is inflation, which must fall — and the tight jobs market is making that "almost impossible." How to trade right now Emanuel of Evercore said investors should buy stocks that he termed "momentum masters," or stocks with price and earnings momentum which are defensive. Some examples he listed are Google , cloud security firm Zscaler and airline service provider Copa Holdings . Emanuel also said that small-cap stocks should "should be in a position to participate in the rally." "They have been laggards again, essentially going back to the bank stress and have less exposure as an index to technology. But for us part of the narrative around the Fed, likely pausing here … says that this is a good time to start dipping one one's toes into small caps," he said. Small-cap stocks can be closely tied to the performance of regional banks. Meeks added that U.S. stocks, in particular tech and other growth names, are too expensive. "Of course, I believe AI stocks are dangerously expensive given all the hype around them," he said. However, if he were to "try to find the next [Nvidia] he would recommend Advanced Micro Devices , Google, Meta or Marvell Technology ." "They'll all benefit from AI and while they're all relatively expensive stocks they're less so than ... NVDA," he said.

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