Raymond James, which entered 2023 with one of Wall Street's more bullish outlooks, remains optimistic, albeit less so now given the stock market's double-digit run year to date, Chief Investment Officer Larry Adam said this week.
"We've been one of the more optimistic on Wall Street coming into this year," he said, noting it was the first time since 2000 that equity strategists overall called for a negative year.
"Obviously now that the market has rallied more than 10%, I'm a little less optimistic because some of those have come back but not fully," Adam told ThinkAdvisor on Tuesday. "I still think we can end the year modestly higher than where we are today."
Raymond James expects the S&P 500 index to end the year at 4,400, according to Adam's monthly strategy snapshot for June.
Coming into the year, the market underestimated the potential for earnings and revenue growth and underappreciated that corporate costs were declining, exports were starting to pick up and supply chains were recovering, he told ThinkAdvisor.
Not Worried About Tech Rally
While some strategists suggest the runup in technology stocks this year has overextended the market, Adam said he wasn't concerned.
"I just think we've had a big recovery," and more important, innovative technologies will provide visibility for earnings in the future, he said. Current price-to-earnings ratios for tech stocks may look expensive, but as a whole, tech is the one sector that consistently beats its earnings forecasts — by an average of about 7% for the past 10 years, the CIO said.
"I'm not as overly worried about tech," he said, citing a positive longer-term outlook for the sector. Artificial intelligence "is a technology that is for real," Adam said, noting that CEOs are seeking tech solutions to make their businesses better and more efficient.
"I think that that's going to continue to bolster tech earnings going forward," Adam said. "It is a theme that has a lot more momentum and life to it than other things that we have seen in the past, and I think that it will continue to be a driver in that sector."
Mild Recession in View
In fact, Raymond James currently favors the tech sector, along with energy, financial and health care.
Raymond James expects a "very mild" recession starting in the fourth quarter. "This is the most telegraphed recession that we've ever seen in the United States," one that economists have been talking about for 18 months, he said.
"I think once we can get into the recession, I think that could potentially start to change the sentiment in a positive way because we'll start to look to come out of the recession," Adam said. "People will start to price in a recovery of earnings and economic growth in 2024, and that's a different mindset and that can actually lift the equity markets" so the market doesn't have to experience the declines typically seen in a recession, he said.
Raymond James defines a mild recession as one that removes about 1% from gross domestic product versus the 2.5% average, lasts six months rather than a year and costs 500,000 jobs rather than 2 million, Adam said.
2 Concerning Risks
Adam noted the two biggest market risks that cause him concern.
The first, that the Fed will misinterpret economic data and cause a big recession. Seasonal adjustments to economic data, like jobs numbers, made before the COVID-19 pandemic "have changed significantly," he said. "I'm not so sure that these official statistics represent what's going on."
Employment figures may appear strong, but companies are announcing layoffs, he noted. "I think the employment conditions are softening more than what (the) data suggests," he said.
The same may be true for inflation data, which doesn't yet reflect year-over-year slowing in real-time housing indicators such as signed sale contracts and leases, he said.
If the Fed thinks inflation isn't coming down enough and employment remains strong, it could keep raising interest rates, leading to a severe recession, Adam said.
