In the face of inflation and rising interest rates, U.S. stocks are projected to see only modest gains by year’s end, according to a recent Reuters poll of strategists. Despite a robust 17% upswing from the close of 2022, the S&P 500 index is anticipated to close the year at 4,496, barely 2.2% above Monday’s close of 4,399.77. This forecast, the median of 41 strategists’ predictions, indicates a more optimistic outlook than the year-end target of 4,150 predicted in a May poll.

The surge in technology stocks, driven by enthusiasm over artificial intelligence, is expected to bolster further market gains. Meanwhile, fears of a U.S. economic cooldown may be overstated. However, eight of the 13 strategists who responded to an additional question in the poll forecast a likely correction in the U.S. stock market by year’s end, with two seeing it as highly likely. Confidence in the Federal Reserve’s efforts to curb inflation and end rate hikes has been a significant propellant of stock market gains this year. Nevertheless, worries persist that the U.S. central bank might maintain higher interest rates longer than anticipated, raising U.S. Treasury yields and sparking concerns about higher borrowing costs’ impact on businesses and consumers.

U.S. Stocks to Show Marginal Gains Amid Inflation Concerns

U.S. stocks are predicted to make only slight gains by the end of the year, according to a recent Reuters poll. The primary concerns cited are ongoing inflation and rising interest rates, posing significant risks to the market.

S&P 500 Year-End Forecast

The S&P 500 index is expected to conclude the year at 4,496, a modest increase of 2.2% from its recent close at 4,399.77. This figure represents a 17% rise from the end of 2022, according to the median forecast by 41 strategists between August 9-22. The current prediction is an improvement from the 4,150 year-end target set in a May poll.

Tech Stocks and Market Outlook

The recent surge in technology stocks, driven largely by optimism around artificial intelligence, is expected to support further market gains. Many also believe that a potential slowdown in the U.S. economy might not be as severe as initially anticipated. The S&P 500 has already seen a 14% rise in 2023, after a 19% fall in 2022, while the Nasdaq has enjoyed a 29% increase year-to-date.

Stock Market Correction Expected

However, eight out of 13 strategists anticipate a correction in the U.S. stock market by the end of this year. Two strategists believe that this correction is highly likely. While the Federal Reserve’s handling of inflation has spurred stock market gains this year, the prospect of interest rates remaining high for an extended period has caused worries about the effects on businesses and consumer borrowing costs.

The Impact of Inflation and Interest Rates

The benchmark 10-year Treasury yield reached nearly 16-year highs this week. "Persistent inflation is kryptonite to valuation as it implies a higher-for-longer Fed hawkish stance. Elevated interest rates, due to continued inflationary pressures, result in lower present values and lower stock prices," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. Earnings growth for S&P 500 companies for 2023 is estimated at just 1.8%.

The Role of AI and Market Volatility

At the height of the AI boom, investors were willing to pay high multiples for broader indices and individual stocks. "The environment we’re headed into is going to be marked by volatile and high sticky inflation, higher rates … and you’re probably going to see some shift in market leadership," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

Future Projections

The Reuters poll also predicts that the Dow Jones industrial average will end the year at 36,000, a 4% increase from its recent close. The median forecast for the S&P 500 by end-2024 is 4,800.

Takeaways

As we head towards the end of the year, the U.S. stock market teeters on the edge of higher inflation and interest rates. The tech sector, spurred by AI advancements, may buoy the market, but a correction seems likely. Investors should brace for volatility and potential shifts in market leadership. Despite these uncertainties, the longer-term outlook remains positive, with steady growth expected over the next few years.