Economic Updates
Jefferies outlines base, bull and bear case scenarios for S&P 500
April has been a largely unfavorable month for US stocks, with the S&P 500 recently witnessing the sharpest pullback in roughly six months. In a new note to clients, Jefferies strategists shared their latest projections for the benchmark index and lifted their base case year-end price target.
The continued resilience of the US economy has disrupted the popular trends for 2024, such as multiple interest rate cuts and narrow markets.
Even before the recent market correction, the Magnificent 7 stocks, excluding Nvidia (NASDAQ:NVDA), were aligning with the broader S&P 500’s performance, while momentum stocks have suffered the most in the recent market pullback, Jefferies strategists said in a new note.
“We tactically like value in the near term as the market broadens out, while still favoring strong earnings-backed ROIC stars,” they wrote.
Currently, key macro themes include a focus on market broadening with selective value addition, advocating for the avoidance of leverage and companies with high short-term debt due to expectations of persistently high interest rates, and a cautious approach toward small caps, which face challenges from an earnings perspective with a preference for compounders.
Meanwhile, after a year of extreme return concentration in 2023, where only 27% of stocks outperformed, this year to date, 43% of stocks are performing better than the S&P 500.
“Also, there has been differentiation within Mag 7, as those with limited earnings momentum have been lagging the market even before last week’s correction,” strategists said.
As for their 2024 S&P 500 projections, Jefferies raised their base case estimates for the index to 4,900, with slightly lower-than-consensus earnings per share (EPS) forecast of $270.
In a bullish scenario, the index could reach 5400, assuming the EPS remains unchanged at $270. In their bearish case, with an EPS adjustment to $250 due to margin normalization, the estimates suggest a possible decline to 4,000.
Following a flat growth trajectory in 2023, consensus expectations for FY24 EPS growth are set at 10.2%. This is notably higher than Jefferies’ model, which projects growth at 9.2% for 2024 and 11.8% for 2025 financial years.
The broker said it expects “marginal topline downgrades, while margins are likely to hold up well.”
Lastly, Jefferies strategists said they anticipate a revival in value stocks in the near term, supported by a strong U.S. economy, high oil prices, and broader market participation.
They continue to favor quality stocks, particularly those with high returns on invested capital, due to their strong earnings foundations.
“Defensive quality is also likely to do well, while momentum will be adversely impacted,” they added.
