The S&P 500 (SPX) index is likely to remain range-bound in the coming months, Wells Fargo strategists said in a note published Wednesday.
The SPX is trading close to its record high of 5,667 that it reached in mid-July, while the 10-year Treasury note fell to under 3.7%, which is below the bank’s year-end target range.
Despite the rally in both stock and bond prices, the strategists expressed concern that these valuations might be stretching beyond what fundamentals support.
In light of the upcoming presidential election and what is typically a weaker season for equities, Wells Fargo strategists believe investors should prepare for potential market weakness.
The firm has adjusted its investment strategy, moving funds from short- and long-term fixed-income allocations into intermediate maturities and stocks. Moreover, Wells Fargo has raised its rating for small-cap equities to Neutral from Underweight, though it continues to prefer large-cap stocks over the Russell 2000 Index.
The strategists foresee economic weakness in the immediate quarters ahead but anticipate an eventual improvement. They expect the Federal Reserve to implement a series of rate cuts, amounting to a total reduction of 175 basis points by the end of 2025.
“We anticipate that these Fed cuts should have a positive effect on the economy and markets in 2025,” the strategists said. “We believe the global economy is likely to benefit as well as major central banks around the world have already cut rates or are on the verge of doing so.”
Amidst the current uncertainties, including seasonal market tendencies and a closely contested presidential election, the strategists suggest that the S&P 500 Index may experience range-bound trading in the months to come.
They advise investors to trim positions in less-favored sectors, such as Real Estate, Utilities, Consumer Discretionary, and Consumer Staples, when the index is trading at the higher end of its range.
On the other hand, should the market dip toward recent lows, the strategists recommend investing sidelined funds in sectors like Energy, Communication Services, Financials, Industrials, and Materials, which they believe offer stronger balance sheets, more dependable cash flows, and more reasonable valuations.
“Uncertainty often results in opportunity. We believe 2025 may offer investors an improving economy that is benefitting from Fed rate cuts,” the strategists continued.
“The goal is to take advantage of opportunities now and in coming months to make portfolio adjustments in equities and fixed income that we believe have the potential to benefit performance next year."