5 reasons the S&P 500 will rally in year-end and 2024 after entering a correction, Wall Street strategist says

• Investors shouldn't give up on the stock market just yet, according to Raymond James.
• The investment firm said the 10% correction in the S&P 500 should transform into a year-end rally.
• These are the five reasons why Raymond James remains optimistic towards stocks.

It's been a tough period for stock market investors since the end of July, with the S&P 500 falling 10% into correction territory.

But Raymond James chief investment officer Larry Adam said investors shouldn't give up on stocks just yet, as there could be a rally into year-end and beyond.

"Equity pullbacks are never comfortable, but it is important to put them in perspective," he said in a Friday note to clients.

Adam has a year-end 2023 and 2024 S&P 500 price target of 4,400 and 4,650, respectively, representing potential upside of about 6% and 12% from current levels.

These are the five reasons why Adam expects stocks to perform well.

1. The end of the Fed's tightening cycle

"We believe the Fed's historic tightening cycle is nearing an end (if not already over)," Adam said, even in the face of a strong 4.9% GDP growth print in the third-quarter.

He highlighted that the core PCE indices show an ongoing trend of inflation decelerating, which is the Fed's top priority.

"This should give the Fed comfort to pause at their policy meeting [this] week. Given we expect growth to soften and the jobs market to cool further as we head into the final months of the year, the Fed's job is likely done," Adam said. "If we're correct, this should bode well for stocks as the S&P 500 typically gains 14% the 12 months after the Fed's final rate hike."

2. Lower interest rates

The macro drivers of a softening economy and continued disinflation should limit the upside in interest rates going forward, and should eventually lead to interest rates falling, not rising. 

"If this happens, it should support an improvement in the multiple, driving equity prices higher," Adam said.

3. Solid mega-cap tech earnings

The S&P 500's earnings recession is set to end in the third quarter, largely thanks to the solid results from mega-cap tech companies like Microsoft, Alphabet, and Amazon. But investors don't seem to be taking notice yet.

"There is an apparent disconnect between the actual results and the market performance of several of the mega-cap tech names that reported [last] week. For example, despite posting blended EPS growth of 44% year-over-year and crushing estimates by ~13% in aggregate, a composite of MAGMAN declined 4% during the week and is now down 10% from recent highs," Adam said.

MAGMAN refers to the earnings results from Microsoft, Amazon, Alphabet, Meta, and consensus estimates from Apple and Nvidia. 

"These price moves are inconsistent with fundamentals, and the positive results from these mega-cap names combined with solid results from the financials leave us confident in our 2024 S&P 500 earnings forecast of $220 to $225," Adam said.

4. Year-end seasonals

Stock recently have been following seasonal patterns seen in the last 50 years, namely, declining in August, September, and into October, Adam pointed out.

"Fortunately for investors, the seasonal trend is set to turn to a tailwind as we enter two of the strongest months of the year with the S&P 500 up an average of 1.5% and 1.2% in November and December respectively," he said.

5. Bearish sentiment flashes contrarian signal

Investor optimism towards the stock market has "largely evaporated" over the past couple of months, Adam highlighted, with bearish sentiment in the AAII investor survey jumping to a five month high. That represents a contrarian buy signal.

"Cautious sentiment leaves us more optimistic that the market can move higher over the next 12 months."