According to Citi, the stock market should see better days as the end of the year approaches. On Thursday, the stock market erased gains made in the previous session, while bond yields rose. Wednesday’s rally came after the S&P 500 hit a new low for the year. “We’re set for a risk-on rally, call it a relief rally, sometime in the fourth quarter,” Citi US equity strategist Scott Chronert said on “Squawk on the Street” on Thursday CNBC. He expects earnings to be resilient during the third-quarter reporting period, which begins in mid-October. Also, sentiment is dire, with Citi’s Levkovich Index officially entering “panic” with last Friday’s reading. That leads to a high probability of a positive 12-month return for the S&P 500, Chronert wrote in a note earlier this week. By late morning Thursday, the index fell below Citi’s recession scenario level of 3,650. “It won’t take much in terms of a change in perception around the interest rate front, combined with stable fundamentals through the third quarter to trigger a rally,” Chronert said on Thursday. Its year-end price target on the S&P is 4,200, implying a nearly 13% increase from Wednesday’s close. Looking to the first half of 2023, Chronert has given a 5% chance of a severe recession. However, as the Federal Reserve continues to use its voice as a policy tool, as it did when Chairman Jerome Powell warned of “some pain” in August, that likelihood will likely “adjust to as we go along,” he said. “There’s no epic surprise here that as you continue to work this policy toward higher fed funds rates, you start to take on the risk of a more dire economic fallout on the other side,” Chronert said. – CNBC’s Michael Bloom contributed reporting.
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