The stock market is in a bottoming process that will lead to 17% upside by early 2023 as the Fed gears up for a data-dependent pause, Stifel says

The market is going through a bottoming process that will lead to more gains in the future.

According to a Wednesday note from Barry Bannister, there are a number of catalysts that can propel the S&P 500 up to 4,400 by the first quarter of 2020.

He believes the price-to-earnings ratio is bottoming if the Fed becomes more aggressive in its monetary policy in November and December.

The question is whether the process can be done quickly enough for the Fed.

The 8.3% August inflation report came in hotter than expected and led to a massive sell-off in the stock market, but it did represent a moderation from July's 8.5% and June's 9.1% pace.

Lower inflation readings should give the Federal Reserve confidence in shifting to a pause in interest rate hikes as it becomes more data dependent at each meeting, and that shift could cause big upside in stock prices.

The most important thing for the direction of the S&P 500 is whether or not the economy enters a recession, and he doesn't think that will happen until the third quarter of 2023. There's a long period of time until the end of the first quarter for stock market gains.

Favorable seasonal stock market data can be found in that trading window.

From November 1 to April 30 is when most S&P 500 returns occur. Do you not want to fight seasonal? He said, "Banning said." The Fed policy and S&P 500 negative seasonality should be a thing of the past by the year's end.

There could be considerable clarity to several worries investors are concerned about by November, including the Russia-Ukraine war, better winter forecasts, and a resolution to the US midterm elections, according to the note.

In order to position for a potential market rally into early next year, investors should own large tech and value stocks in the retail, homebuilding, and bank sectors.

Stifel