HSBC says S&P 500 to reach 5,000 next year, but could rally even more in a soft landing

Published Wed, Dec 13 20233:27 PM ESTUpdated Wed, Dec 13 20233:43 PM EST

The S & P 500 could end 2024 at 5,000, and even go higher if a recession is avoided, according to HSBC. Equity strategy chief Nicole Inui on Wednesday set the target, which implies an upside of 7.7% over Tuesday's close. The potential for interest rate cuts in the year ahead is a tailwind for stocks, while the state of earnings in a slowing economy and next November's presidential election are headwinds. Returns in a U.S. election year are typically meager, she said. On the upside, however, her target has a caveat: 5,000 could prove conservative if the Federal Reserve is able to bat down inflation without tipping the economy into a recession, resulting in a soft landing. HSBC's expectations mark a turn from 2023, which Inui said began with a "doom-and-gloom scenario" before ending on a note of "cautious optimism." While Inui said the market heads into 2024 with a more positive narrative, she isn't overly bullish due to some key variables. "We believe market expectations are more optimistic heading into 2024 but far from euphoric," she wrote in a note to clients announcing the expected year-end level. Inui noted that when a recession is avoided, the S & P 500 has returned an average of 22% between the first pause in interest rate moves after prior hikes and six months after the first cut to rates. This time, too, the S & P 500 could see upside of 20% or more from now until six months after the first rate cut, which HSBC expects to come in the third quarter of 2024. The bank expects earnings growth to swing from around flat in 2023 to 8% in 2024, helped by continued margin expansion and a receding overhang from commodities. But consensus estimates still show a considerable slowdown in economic activity on the horizon, restricting earnings from growing even more. This interest rate cycle's easing period should also be "shallow" compared with market expectations, she said. Rate reductions coming later in the year than investors now expect can also limit upside in 2024, the strategist added. Inui's target implies an extension of 2023's advance, with the S & P 500 now poised to end the year 22% higher than last year. — CNBC's Michael Bloom contributed to this report.