Stocks take on an optimistic trajectory in the final weeks of 2023 as they extend gains on Tuesday. The S&P 500 (^GSPC) currently sits above Comerica Wealth Management Chief Investment Officer John Lynch's own 4,750 year-end point target.

Lynch joins Yahoo Finance to discuss his forecasts for the stock market and the US economy amid interest rate cuts by the Federal Reserve.

"One of the things I'm really pleased about with the market action over the last six weeks has been that the equal-weighted index is starting to catch up to the cap-weighted index. so I think that's a very important development," Lynch says.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

This post was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: Well, while stocks close in on records, our next guest isn't quite as optimistic for the broader market next year.

His yearend target, 4,750.

That's below where we are right now.

Joining us now is John Lynch, Comerica Wealth Management Chief Investment Officer.

John, what strikes me is that it doesn't sound like, from reading your notes, that you're that pessimistic about the economy, right?

So talk to me then about, and this is always a perennial discussion, the economy versus the market.

JOHN LYNCH: Thank you, Julie.

Good afternoon.

Yes, writing these reports is always very humbling, right?

You do all the analysis in the first part of November.

You get it published through Thanksgiving weekend.

And you publish it right thereafter.

And sure enough, the market goes up 12% over that time period.

So I do believe that the equity market, yeah, I was looking at, you know, 8%-ish type profits and market growth next year.

But we've run away.

We've gotten way ahead of expectations.

As you just discussed with expectations on Fed rate cuts, I think the market's been a little too optimistic.

I'm delighted to hear Fed officials starting to tamp down some of that enthusiasm.

And you're absolutely right, I think we'll have fractional gains in the first half of the year economically real GDP.

And I think we stabilize in the second half of the year.

So not necessarily a bearish outlook by any stretch of the imagination.

However, the market has gotten ahead of itself and certainly gotten ahead of my forecast.

JOSH LIPTON: So, John, it mostly sounds you're like, correct me if I'm wrong, you're making a valuation call.

You just think the good news has been priced in at these levels?

JOHN LYNCH: Absolutely, Josh.

We're up 20%, 22% year-to-date on basically flat profits, right?

So it's been a PE-driven market.

And one of the themes of my '24 outlook was that the E must substantiate the P. And I think we need to accomplish that next year to really get a stronger foundation under the market.

And clearly, over the last six weeks, we've had about a net $300 billion injection of liquidity into the markets.

So that's consequently weakened the dollar.

It's pushed market interest rates down.

It's certainly boosted equities as a result.

JULIE HYMAN: And where do you think, if we do get the growth in that E, where is it going to come from?

You know, you heard us just talking about the domination once again of the Magnificent Seven.

Are we going to see a broadening, not just of participation, but also earnings growth from the market?

JOHN LYNCH: Yes, Julie.

The broadening of participation is very important.

One of the things I'm really pleased about with the market action over the last six weeks has been that the equal weighted index is starting to catch up to the cap-weighted index.

So I think that's a very important development.

So, a, you have broadening.

B, specific to your question, communication services really needs to deliver on that 50% gain year-to-date, right?

They need to deliver from a profit standpoint.

I think you'll need to see that on the technology space.

I am looking at almost a barbell strategy, if you will, health care, which will have some growth, good earnings growth.

And also, for anyone concerned about interest rate sensitivity, not necessarily affected there.

And then the industrial space has been quietly firming all year on a relative basis to the S&P 500.

And I think it will be-- I think that group is set the stage, if you will, for strong profits, given the Inflation Reduction Act, given infrastructure spending, and to the degree that global growth stabilizes as we suspect it will.