Stock market strategists and portfolio managers who expected equities to go nowhere in 2023 are changing their tune as their fears transform into the fear of missing out on a potential rally.

Morgan Stanley Investment Management’s Andrew Slimmon thinks his recent view that the S&P 500 Index will cap December near 4,200 is now too low, the senior portfolio manager in the bank’s investment management arm said in a phone interview. The benchmark US stock gauge could rally toward 4,600 into the end of the year as markets price in an earnings recovery in 2024 and investor FOMO kicks in.

“If I were a financial advisor and it gets to October, November and I haven’t made money for my clients because I’m heavily in cash, I would start to get nervous,” he said. “My conjecture is that cash starts to get back into the market later into the year.”

The lifted expectation from Slimmon comes just days after Bank of America equity strategist Savita Subramanian raised her year-end price target on the index to 4,300 from 4,000 previously, with a new range of 3,900 to 4,600.

“With the exception of some very permanent bears who are digging in their heels, more and more people will begrudgingly raise their estimates,” Slimmon said.

Despite a choppy May, US equities have remained resilient to a series of headwinds this year, from higher interest rates, to turmoil in the banking turmoil, to the prospect of an imminent recession. Still, the S&P 500 is up more than 7% in 2023, while the technology-heavy Nasdaq 100 Index has rallied 24%.

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Bad Breadth Even skeptics who’ve sound the alarm about a dangerous lack of breadth in this year’s gains are starting to change their view.

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S&P 500 Index Performance Breadth Lowest Since 1999 | Percent of outperforming stocks dropped to only 29%

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“Narrow breadth is not a precursor for doom and gloom,” Subramanian said in an interview with Bloomberg Surveillance Tuesday.

What traders are starting to see are signs of FOMO.

Last week, investors added US$21 billion in new long positions on the S&P 500, according to data from Citigroup Inc. — one of the largest weekly flows of new longs tracked by the firm in recent years. Meanwhile, Goldman Sachs Group Inc.’s prime brokerage unit also hedge funds that make both bullish and bearish bets bought US shares for two straight weeks, with purchases reaching the fastest pace since October after a bout of persistent selling.

Taken together, the setup appears ripe for a potential bullish flip for the stock market in the second half of the year.

“If you look back on the history of when we had drawdowns like we had last year, the behavioral element is consistent over time,” Slimmon said. “After big drawdowns, people get bearish but then as the market begins to lift — and we’ve had two straight quarters now of positive returns  — behaviorally, it starts to suck investors in and you begin to see a progression of fear to FOMO.”

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