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Is Market Optimism in Cards as Rates Peaking? Top ETFs to Buy

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In the face of looming fears regarding another Fed rate hike and a potential consumer slowdown as 2023 draws to a close, some investors are expressing concerns about the outlook for equities. However, Bank of America's head of US equity & quantitative strategy, Savita Subramanian, offers a reassuring message for equity investors, as quoted on Yahoo Finance.

Bank of America's Bullish Outlook

Bank of America has revised its year-end target for the S&P 500, raising it from 4,300 to 4,600 in the aforementioned note. This upward adjustment implies a roughly 3% upside potential from the S&P 500's current levels. Subramanian interprets this as a signal that markets are in a "recovery phase."

Contrarian Indicator and Historical Trends

Bank of America's year-end S&P 500 target of 4,600 stands out as one of the highest among Wall Street strategists tracked by Yahoo Finance. Contrary to common sentiment, BofA's research indicates that this is a positive sign. Historical data dating back to 1999 reveals that when the average S&P 500 year-end target in August projects a 5% gain by year-end, it typically aligns with market performance.

However, this year's consensus forecast suggests a 2% decline in the S&P 500 by the end of 2023. Notably, when the consensus predicts a slump in the final four months of the year, the S&P 500 has consistently defied expectations, delivering better-than-average returns compared to years when gains were projected. It means, consensus or BofA’s lofty projections, the S&P 500 is likely to post a return better than a decline of 2% by the year-end.

Earnings Recovery in the Cards

The bank's equity strategy team believes that the profit declines observed in second-quarter earnings represent the bottom, which could potentially drive a resurgence in stock performance since corporate profits often influence stock markets. Per Earnings Trends issued on Sep 20, 2023, S&P 500 earnings are expected to decline 1.8% in Q3 on 0.8% higher revenues. This would follow 7.1% decline in Q2 earnings over a 1.1% uptick in revenues.  

Upward Revisions in U.S. GDP Growth Projections

The Fed recently revised upward their economic growth forecasts for the current year, with gross domestic product (GDP) expected to rise by 2.1%, more than double the June estimate. This suggests an expectation of continued economic expansion without an imminent recession. The GDP outlook for 2024 also increased from 1.1% to 1.5%.

Falling Inflation Amid Tight Labor Market

The expected inflation rate, as measured by the core personal consumption expenditures price index, decreased to 3.7%, down by 0.2 percentage points from June. Additionally, the unemployment outlook was revised to 3.8%, compared to the previous 4.1%.

Fed Rate Cuts Expected in 2024

The Fed's dot plot projections unveiled the likelihood of one more rate hike in 2023, but two rate cuts in 2024. Although the number of rate cuts are fewer cuts than previously indicated in June, cues of monetary policy easing should make investors happy. The move would place the funds rate at around 5.1%.

ETF Picks

Against this backdrop, below we highlight a few ETFs that have a Zacks Rank #1 (Strong Buy) and added better returns than the S&P 500 (up 0.6%) in the past one month.

Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report) ) – Up 5.8% Past Month

SPDR NYSE Technology ETF (XNTK - Free Report) ) – Up 5.12%

iShares Expanded Tech-Software Sector ETF (IGV - Free Report) ) – Up 4.7%

Financial Select Sector SPDR ETF (XLF - Free Report) ) – Up 2.9%

SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) ) – Up 1.2%

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