S&P 500 to 'chop sideways' and struggle to make new highs says Wells Fargo

Investing.com -- Wells Fargo analysts said in a note Tuesday that the S&P 500 may struggle to make meaningful new highs in the coming months, particularly due to seasonal patterns and the approaching U.S. election.

"Our view is that in the coming months, bouts of volatility are likely while stocks chop sideways and struggle to make meaningful new highs," Wells Fargo stated.

The bank pointed out that “in each of the past seven years, the S&P 500 Index has experienced a late-summer peak and subsequent drawdown ranging from 5% to 20%,” signaling a potential for similar stock declines in 2024.

They attribute this trend to simmering economic concerns, geopolitical risks, and waning confidence in artificial intelligence's immediate impact on markets.

Furthermore, the upcoming election adds another layer of uncertainty.

Wells Fargo noted that “volatility typically spikes as we approach an election,” and this cycle’s tightly contested race could exacerbate market instability.

Despite the cautious outlook, Wells Fargo said: "Volatility presents opportunity, and we favor being prepared."

"We suggest having a shopping list ready if markets approach recent lows," adds the bank. "We are favorable U.S. Large Cap Equities as well as the S&P 500 Index Communication Services, Energy, Financials, Industrials, and Materials sectors."

Additionally, they recently upgraded U.S. Small Cap Equities to neutral, suggesting it could be an attractive addition for portfolios underallocated in that space.

Conversely, if markets approach recent highs, Wells Fargo advises trimming exposure to underperforming sectors like Consumer Discretionary, Consumer Staples, Real Estate, and Utilities, as well as Emerging Market Equities.

Looking ahead, Wells Fargo is optimistic about 2025, expecting the economy to pivot from a slowdown to sustained growth post-election, leading to an earnings recovery and equity rally. They summarize the outlook with the advice to "Keep an eye on '25."

Source: Investing.com