Piper Sandler raises S&P 500 target for 2023 as stock-market breadth expands, positive earnings underpin equities

As of July 30, there were approximately 79, or nearly 16% of stocks in the S&P 500 making year-to-date record highs in 2023, while there were 171, or 17% of stocks in the Russell 1000 Growth Index
RLG,
-0.03%
making their record highs this year. The blue-gauge Dow Jones Industrial Average
DJIA,
+0.09%
has 7, or 23% of stocks logging their highest levels of all time so far in 2023, according to data compiled by Piper Sandler Technical Research (see chart below).

“This study detracts from the assertion that the market’s leadership has been limited to just seven ‘magnificent’ megacap stocks,” wrote Johnson and Smith, in a Monday note. 

Among all 11 sectors in the S&P 500, industrials
SP500.20,
-0.01%
has the most amount of S&P 500 constituents making an record new highs year-to-date, followed by consumer discretionary
SP500.25,
+0.32%,
healthcare
SP500.35,
-0.93%
and information technology
SP500.45,
+0.03%.

The financials sector
SP500.40,
+0.15%
sits in the third spot, with almost 2% of its large-caps within the S&P 500 making record highs this year, according to Piper Sandler Technical Research. 

Earlier this year, the seven largest megacap technology companies in the U.S. by market cap — Alphabet
GOOGL,
-0.06%,
Amazon
AMZN,
+0.91%,
Apple
AAPL,
+0.24%,
Meta Platforms
META,
-1.70%,
Microsoft
MSFT,
-0.84%,
Nvidia
NVDA,
+0.08%
and Tesla
TSLA,
+0.46%
— were in focus for driving the S&P 500’s gains. The so-called Magnificent Seven propelled the large-cap index into a bull market in early June, with the gauge now up more than 28% from its low notched last October, and rising to new highs since April 2022, according to Dow Jones Market Data. 

See: The ‘narrow breadth’ chorus has fallen silent. What broadening participation in stock-market rally means for investors.

The S&P 500 has seen a robust rally so far this year, up 19.4% year-to-date and on pace for its best performance through the first seven months of the year since 1997, according to Dow Jones Market Data. The S&P 500 was gaining 1 point, leaving it nearly flat at 4,583 on Monday afternoon. 

”As the market cap-weighted indices suggest, the YTD leadership in this bull market is not just carried by seven ‘magnificent’ megacaps. There are plenty of other large-cap stocks among industrials, discretionary, healthcare, technology and financials, helping lift this market higher as they make record highs,” said Johnson and Smith. 

Meanwhile, the team also pointed to the second-quarter earnings season, which “has not been as bad as some have feared.” 

With 51% of S&P 500 companies reporting actual results as of July 28, 80% of them have reported a positive earnings-per-share surprise, while 64% of them have reported a positive revenue surprise, according to FactSet. 

See: Citigroup raises S&P 500 target for 2023 on increased chances of ‘soft landing’

Johnson and Smith acknowledged that history shows there is a high probability that the S&P 500 will retreat some of its advance in the short term after “multiple consecutive positive months,” but it will eventually resume back to the upside in the intermediate-to-long term. 

There have been 38 occurrences since 1928 when the S&P 500 had five or more straight months of positive returns. Over the next three months, its forward returns averaged a loss of 0.32% with a positivity rate of 50%, according to Piper Sandler Technical Research. However, its forward returns turned positive after six and 12 months with average returns of 1.23% and 8.97%, respectively. 

“We remain bullish over the intermediate term as this bull market off the October ’22 low continues. However, we expect near-term backing and filling with a healthy rotation among sectors over the next several weeks of summer,” said Johnson and Smith.