Wells Fargo (NYSE:WFC) advised investors to move away from the reflation trade, which has been a common strategy following GDP growth and Federal Reserve policy adjustments.
The firm also suggests a strategic blend of Communications and Healthcare sectors, coupled with Utilities, to stay engaged in the market while maintaining some protection.
According to Wells Fargo, the period of significant upward revisions to GDP growth forecasts is likely over, as 2024 projections have almost doubled, reaching a level that no longer supports the reflation narrative.
This assessment is based on a comparison with the historical annual real US GDP growth average of 2.35% from 2010 to 2019.
In the earnings season, Wells Fargo observes a trend where sectors with higher profitability, such as Information Technology and Communication Services, are increasing their contributions to S&P 500 earnings per share (EPS), while less profitable sectors like Health Care and Energy are seeing a decrease.
The broker anticipates this pattern to persist, indicating that a robust economy might not be necessary for strong EPS growth at the index level, which is a key factor in their S&P 500 target of 5535.
"Equities peak above 5500, but volatility not dead," strategists said in a note.
It also noted that portfolio managers are typically penalized for inaccurate market predictions. However, following the Federal Reserve's less aggressive stance in December, the expected penalties did not materialize, as stocks continued to rise.
This outcome, according to Wells Fargo, could encourage more risk-taking and overconfidence among investors, as the repercussions of being "wrong" have so far resulted in higher stock prices.
Wells Fargo concludes that the Federal Reserve's maintenance of the status quo has ironically supported the year-to-date performance of the S&P 500, creating favorable conditions for continued growth in trending mega-cap stocks.