The stock market should see better days ahead as it heads into the end of the year, according to Citi. On Thursday, the stock market erased gains it made in the prior session, while bond yields moved higher. Wednesday’s rally came after the S & P 500 made a new low for the year. “We are set up for a risk-on rally, call it a relief rally, at some point during Q4,” Citi U.S. equity strategist Scott Chronert said Thursday on CNBC’s ” Squawk on the Street .” He’s anticipating earnings resilience through the third-quarter reporting period, which kicks off in mid-October. On top of that, sentiment is dire, with Citi’s Levkovich Index officially moving into “panic” with last Friday’s reading. That carries a high probability of a positive 12-month return for the S & P 500, Chronert wrote in a note earlier this week. In late morning trading on Thursday, the index dropped below Citi’s recession-scenario level of 3,650. “It won’t take much in terms of a shift of perception around the interest rate front, combined with steady fundamentals through Q3 to trigger a rally,” Chronert said Thursday. His year-end price target on the S & P is 4,200, which implies a nearly 13% upside from Wednesday’s close. Looking into the first half of 2023, Chronert has given a severe recession a 5% probability. However, as the Federal Reserve continues to use its voice as a policy tool, as it did when Chair Jerome Powell warned of “some pain” ahead in August, that probability will probably be “tweaked up as we move forward,” he said. “There is no epic surprise here that as you continue to work that policy towards higher fed funds rates, you do begin to bear the risk of a more dire economic consequence on the other side,” Chronert said. — CNBC’s Michael Bloom contributed reporting.
