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The S&P 500 might leap 10% to a record high this year – but plunging interest rates could spell trouble for stocks, Wharton professor Jeremy Siegel says

In Business
January 10, 2024
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Jeremy Siegel.Getty Images

  • The S&P 500 could jump 10% to a record 5,200 points this year, Jeremy Siegel says.

  • The “Wizard of Wharton” says the Fed’s willingness to cut rates is more important than doing so.

  • Siegel warns that a flurry of cuts might signal a recession that could pull down stocks.

The S&P 500 could surge by 10% to a record high of 5,200 points this year — and plunging interest rates could spell trouble for stocks, Jeremy Siegel says.

The retired finance professor known as the “Wizard of Wharton” said the US economy is growing at a “Goldilocks pace” in his WisdomTree commentary this week. It’s not expanding quickly enough to scare the Federal Reserve into cooling it down, but it’s still strong enough to fuel growth in corporate earnings and shore up stocks, he said.

“If real economic growth stays strong, the Fed could keep rates exactly where they are, and we could have strong equity markets,” he said. The rosy economic backdrop could underpin an 8% to 10% rise in the S&P 500 this year, and push smaller-cap value stocks up 15% given their depressed valuations, he added.

The Fed has raised its benchmark interest rate from nearly zero to north of 5% since early 2022, in an effort to wrestle historic inflation back to its 2% target. Steeper borrowing costs can temper price growth by discouraging spending, investing, and hiring, but they can also sap demand so much that the economy shrinks and a recession takes hold.

Siegel disagreed with the idea that the Fed needs to slash rates aggressively this year for stocks to perform well. The key thing is that Fed Chair Jerome Powell has signaled he’s ready to reverse some of the central bank’s hikes if the economy weakens, he said.

“That willingness to cut is more important than having the cut,” he told CNBC on Monday. “Honestly, I would love the economy to keep on chugging along, and if it chugs along at 5% fed funds, that’s not bad for stocks.”

The author of “Stocks for the Long Run” said he expected the Fed to lower rates as inflation cools further — a prospect he hailed as “a real positive for the market going forward.” Yet he noted that a flurry of cuts could indicate a sharp economic slowdown that spooks consumers and investors and hits company earnings.

“One has to realize big rate cuts might mean a real slowdown and recession,” he said. “Well, the stock market doesn’t want that.”

Siegel has been bullish on stock and the economy for a while. In December, he suggested that house prices could rise by 5% to 10% this year, inflation might slow to around 2.5%, the risk of recession was below 50%, and the Fed might cut rates by five or six times to below 4%.

Read the original article on Business Insider

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