HSBC sees limited stock market gains after record-setting rally, tells investors to wait for a better entry point

Published Wed, Jan 24 202412:11 PM EST

The stock market may not go much higher for the rest of 2024, according to HSBC. The bank maintained its year-end target for the S & P 500 of 5,000 points, which implies just 2.8% upside from Tuesday's close. Stocks have been on a tear recently, with the broad market index reaching a fresh record high Tuesday. Last week, it posted its first all-time closing high since January 2022, confirming a bull market run that began in October 2022. The S & P 500 jumped 24% last year and is up more than 2% in 2024. .SPX 1Y mountain SPX in past year "While we remain structurally positive on the U.S. equity story, we believe the sharp moves in equity markets were a little too much, too fast. Our sentiment and positioning indicators are now looking stretched," strategist Nicole Inui wrote in a recent note. "We expect to see better entry points once the market re-prices rates expectations." According to Inui, three themes will dominate the market this year: The timing and extent of Federal Reserve interest rate cuts Earnings growth potential amid a slowing economy U.S. presidential elections HSBC sees a "shallower and later start to the easing cycle than what is currently priced in by the markets," which it believes is a more favorable outlook for equities. The firm expects the first rate cut to happen in June and sees 75 basis points of decreases for of 2024. That's compared to market expectations of 140 basis points. "For the Fed to start cutting rates by Q1 2024 (as the market expects), economic activity and the labor markets would likely need to slow considerably," Inui wrote in the note. "That slowing would likely dampen earnings growth expectations and increase recession probabilities." HSBC expects the U.S. to avoid a recession but thinks economic activity will see a significant slowdown. The bank is forecasting real GDP growth of 1.7% this year. The firm is also more conservative on earnings growth expectations for the S & P 500: While consensus estimates call for 12% growth, the firm is sitting at flat growth of 8% between 2023 and 2024. Tech and consumer discretionary sectors should see the highest earnings growth, according to the firm. Stock picks Inui also thinks that consumer spending will remain healthy as inflation has slowed more than wage growth. But while deflation can be a boon for consumer spending, she said it can pose a negative risk to retailers, particularly if retailers can't sell more volume as food prices lower. Preferred, buy-rated retail picks from HSBC analysts are Walmart given its large customer base and CVS Health for its attractive loyalty program. Procter & Gamble and Mondelez International are other HSBC picks from the consumer staples sector, which the firm views as a highly resilient play as customers continue to be conscious about their spending. Both companies have "solid brand equity and pricing power," the note said. Buy-rated energy companies Chart Industries and Chevron and financials Citigroup and Goldman Sachs are among the firm's other preferred name for the year ahead. Chart Industries is a "broad play" for the energy transition and clean hydrogen value chain, and the company should see accelerated growth this year as it enters new clean power and industrial markets from its acquisition of air and gas company Howden, the firm said. Citigroup is the HSBC's top bank pick, as analysts believe the firm's expense reductions should drive profitability higher in 2025 and beyond.