Wells Fargo Predicts Economic Soft Patch to Impact US Equity Rally

According to Yahoo News, strategists at the Wells Fargo Investment Institute have warned that an upcoming "economic soft patch" is likely to affect the recent US equity rally and stall sectors such as consumer discretionary and small-cap stocks. The firm has reduced its 2024 earnings estimate for the Russell 2000 index of small-cap stocks while maintaining its 2024 year-end S&P 500 target price range between 4,600 and 4,800. The index was trading near 4,550 on Monday. The Wells Fargo Investment Institute noted that although the US economy is slowing down, it has not deteriorated enough for the Federal Reserve to start cutting interest rates. Consequently, the economy will likely experience the squeeze of tighter credit for a longer period than markets currently anticipate. The firm believes that equity rallies will be capped until a path to an economic and earnings recovery becomes clear. They suggest investors add to large-cap technology stocks if the S&P 500 falls near the bottom of its range for the year. The S&P 500 has risen more than 10% over the past three weeks as Treasury yields have dropped from 16-year highs due to signs of cooling inflation and a weakening labor market, boosting valuations in technology and other growth sectors. The Atlanta Fed's GDPNow estimates show US gross domestic product growing at a 2.1% annualized rate in the fourth quarter, down from a third-quarter reading of 5.1% in early October. Futures markets currently predict a 22% chance that the Fed will begin cutting rates in March, up from a 13.7% chance seen a month ago, according to CME's FedWatch Tool. Wells Fargo expects a re-acceleration of the global economy in the second half of 2024 to push stocks higher as a weakening dollar and falling interest rates spark a global risk rally.