US stocks have rebounded in 2023, with the benchmark S&P 500 advancing almost 8%.
But investors shouldn’t expect the rally to last, according to Wells Fargo.
“We see neither a bull nor a bear market, just a market,” analysts said.
The worst is over for stocks but investors should prepare for a period of relative normality rather than another bull market run, according to Wells Fargo.
“We see neither a bull nor a bear market, just a market,” a team of analysts led by Chris Harvey wrote in a Monday research note titled “Bear Exits, but Bull Stuck in Traffic”.
Stocks have rebounded at the start of this year with a surprise rally that’s led some investors to shrug off memories of a turbulent 2022.
Wells Fargo pointed to a narrowing in investment-grade credit spreads as one sign that the bear market is coming to an end.
Credit spreads reflect the difference in yield between corporate bonds and similar-maturity government debt, with a tightening gap seen by economists as a sign of market health.
“Bear markets often end when we see sharp tightenings and healthy issuance similar to what we have experienced over the last several months,” the analysts said. “When bear markets go ‘next level’ spreads widen, not tighten.”
But the bank is expecting a period of ‘just-a-market’ normality rather than a surge for stocks.
Harvey’s team said that S&P 500 share prices still look high relative to companies’ earnings – and that more bullish market voices are discounting the potential risk of an economic downturn.
“It is not April 2020 and we do not envision a sustained rally in risk,” Wells Fargo said, referencing the surge in stocks, real estate and cryptocurrencies that took place between the start of the US’s COVID-19 lockdowns and the end of 2021.
“A continued re-pricing of risk is neither supported by valuations nor the economy. Expect a near-term reversal,” the strategists added.
Harvey maintained an end-of-year target for the S&P 500 of 4,200 points – which would represent a rise of just 2.7% from the 4,090 level the benchmark traded at as of Monday’s closing bell.
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