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Business News/ Markets / Stock Markets/  Wells Fargo sees economic 'soft patch' capping further S&P 500 gains
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Wells Fargo sees economic 'soft patch' capping further S&P 500 gains

US equity rally expected to be weighed down by upcoming economic soft patch, impacting consumer discretionary and small-cap sto

The benchmark S&P 500 is up more than 10% over the last three weeks as Treasury yields have fallen from 16-year highs (REUTERS)Premium
The benchmark S&P 500 is up more than 10% over the last three weeks as Treasury yields have fallen from 16-year highs (REUTERS)

An upcoming "economic soft patch" will likely weigh on the recent US equity rally and stall sectors such as consumer discretionary and small-cap stocks, strategists at the Wells Fargo Investment Institute warned in a note on Monday.

The firm cut its 2024 earnings estimate for the Russell 2000 index of small cap stocks while maintaining its 2024 year-end S&P 500 target price range between 4,600 and 4,800. The index traded near 4,550 on Monday.

Wall Street week ahead: Investors eye key US economic data, OPEC+ meet

While the US economy is slowing, it has not deteriorated enough to justify the Federal Reserve beginning to cut interest rates, the firm noted. As a result, the economy will likely suffer from the squeeze of tighter credit longer than markets appear to anticipate, it said.

"It is our belief that equity rallies will be capped until a path to an economic and earnings recovery becomes clear," the firm noted, adding that it suggests investors add to large-cap technology stocks if the S&P 500 falls near the bottom of its range for the year.

Market looks steady as global equities head towards big monthly gains

The benchmark S&P 500 is up more than 10% over the last three weeks as Treasury yields have fallen from 16-year highs following signs of cooling inflation and a weakening labor market, helping boost valuations in technology and other growth sectors. It hit a high for the year in late July as predictions of an imminent recession sank Treasury yields.

The Atlanta Fed's GDPNow estimates show US gross domestic product growing at a 2.1% annualized rate in the fourth quarter, down from a third-quarter reading of 5.1% in early October.

Overall, futures markets anticipate a 22% chance that the Fed begins cutting rates in March, up from a 13.7% chance seen a month ago, according to CME's FedWatch Tool.

A re-acceleration of the global economy in the second half of 2024 will likely push stocks higher as a weakening dollar and falling interest rates spark a global risk rally, Wells Fargo said.

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Published: 28 Nov 2023, 01:15 PM IST
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