Zero Fed Rate Hikes Baked Into S&P Forecast, Says Wells Fargo's Cronk
Speakers
Darrell Cronk
— Chief Investment Officer, Wells Fargo
Summary
Wells Fargo CIO Darrell Cronk lays out a scenario where the Fed holds rates steady, driving the S&P 500 to 7,900 by year-end. He describes the recent market action as a rotation within equities, not a sell-off, and highlights long-end yield resilience, a bifurcation in financials, a near-term dip in tech, and poor small-cap index quality.
- S&P 500 year-end target of 7,900 assumes zero Fed rate hikes
- Long-end Treasury yields expected to remain elevated despite lower oil
- Equity weakness characterized as rotation, not a broad sell-off
- Large and regional banks breaking out on steepening yield curve
- Technology sector still attractive but faces near-term headwinds and a better entry point later
- Small-cap index seen as unattractive due to top names graduating to larger caps
- Financials highly bifurcated: banks strong, payment processors and alternative managers lagging
Ideas
Long-end yields will stay high
Long‑end Treasury yields have not fallen despite lower oil and falling inflation expectations. The firm expects the long end to stay higher even in the absence of further rate hikes.
S&P 500 target 7,900 on zero hikes
S&P 500 year‑end target of 7,900 assumes zero Fed rate hikes this year. If the Fed delivers the 40bp of hikes priced into fed funds futures, the year‑end target would have to be lower.
Tech sector still favored, buy dips
Technology sector is still liked overall, but near‑term weakness is expected through the summer months due to a very high Q2 earnings bar and seasonal headwinds. A cheaper entry point will emerge, creating a better dip‑buying opportunity.
Avoid small cap, index quality eroding
Small caps are not liked because the top names in the Russell 2000 have outgrown the small‑cap threshold and will graduate to mid/large caps. These names represent 47% of small‑cap return; their removal will continue to dilute the index’s integrity and quality.
Banks breaking out on steep yield curve
Financials – especially large and regional banks – are breaking out and have strong fundamentals. A steepening yield curve, robust sales and trading, strong M&A and a supportive IPO environment all favour the sector. The space is bifurcated: payment processors, Berkshire Hathaway and alternative asset managers are not doing well, but large and regional banks are near highs and breaking out.
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