After being bearish on U.S. stocks, Wall Street faces a collective "slap in the face" in 2024

The Zhitong Finance APP noticed that by this time last year, the stock market's rise even exceeded the most optimistic expectations, and Wall Street forecasters were convinced that it could not maintain its dazzling pace.

As strategists from Bank of America, Deutsche Bank, Goldman Sachs, and other major companies began to issue forecasts for the 2024 outlook, a consensus gradually formed: after a boom in tech stocks driven by breakthroughs in artificial intelligence, and an economy that continually challenged the pessimists' predictions, leading to a more than 20% surge in the S&P 500 index, the S&P 500 index might only see a slight increase in 2024. With the Federal Reserve shifting towards interest rate cuts, the timing for U.S. Treasury bonds to compete with the stock market was seen as ripe.

What followed embarrassed Wall Street's prophets once again, as they had been caught off guard by the market's fluctuations since the end of the pandemic.

In 2024, stock prices not only did not lose momentum but continued to soar. By the end of December, the S&P 500 index had already surpassed strategists' year-end average targets. Subsequently, the index set one historical high after another and was expected to achieve a 25% increase in 2024, marking the strongest consecutive annual gain since the internet bubble of the late 1990s.

Julian Emanuel, Chief Equity and Quantitative Strategist at Evercore ISI, stated, "There is an element of miracle in this." He abandoned his prediction of a slight decline in the S&P 500 index mid-year and became the first among major strategists to propose a year-end target of 6000 points. "Trends can last longer and go further than people think."

Even the most optimistic forecasters did not anticipate such significant growth in 2024.

The continuation of this trend proves that even after the Federal Reserve pushed interest rates to their highest levels in over twenty years, the post-pandemic economy is still steadily expanding, which has left forecasters astonished.

As 2023 comes to a close, the bond market has surged strongly due to market speculation that central banks will need to begin significantly easing policies, with fixed income strategists predicting that the benchmark 10-year U.S. Treasury yield will fall to around 3.8% by the end of this year. However, this has not been the case, as the yield has risen to over 4.6%.

A strong economy has driven the stock market up and gradually benefited corporate profits. Meanwhile, enthusiasm for artificial intelligence continues to push up the stock prices of major tech companies such as Alphabet, Amazon, Apple, Meta Platforms, and Nvidia. Trump's victory in the presidential election and his promises of tax cuts and business-friendly policies further supported the stock market's rise.

Highly Concentrated Weights

This result has largely dampened Wall Street's bearish sentiment and prompted some strategists to abandon their pessimistic rhetoric and surrender.

Morgan Stanley's Mike Wilson had issued a series of warnings in 2023, stating that the stock market was about to decline, but by May of this year, he turned bullish on the market. JP Morgan's Marko Kolanovic left JP Morgan in mid-2024 after a 20-year tenure. Kolanovic had predicted that the S&P 500 index would drop 12% by December. At the end of November, Dubravko Lakos-Bujas, the current head of JP Morgan's market research team, abandoned previous bearish targets and predicted that the S&P 500 index would continue to rise next year.

Lakos-Bujas stated that some of the team's missteps reflected the difficulty in predicting the surge of the so-called "seven sisters" of tech stocks, which accounted for a significant portion of the S&P 500's gains. However, he noted that this optimism is well-founded, citing factors such as the Federal Reserve's easing policies, the power transition in the White House, and China's desire to maintain economic growth.

Lakos-Bujas said, "We actually had three adjustments." He expects the S&P 500 index to rise to 6,500 points next year, an increase of about 9% from Friday's level. This "changed our thinking process regarding risk assets and stocks."

It wasn't just the pessimists who were caught off guard. This year, after the S&P 500 index surpassed its target, nearly every top strategist tracked by Bloomberg has raised their S&P 500 target at least once.

When the S&P 500 index target was first announced at the end of 2023, even the most optimistic forecasters at the time—Fundstrat's Tom Lee and Oppenheimer's John Stoltzfus—expected the S&P 500 index to rise only about 9% to 5,200 points, while the S&P 500 index exceeded this level in less than three months.

The stock market did experience a pullback at one point, but this reversal proved to be short-lived. Although the S&P 500 index declined from mid-July to early August, it quickly regained upward momentum as concerns over tech company earnings eased. The sell-off triggered by Federal Reserve Chairman Powell's hawkish remarks this month also quickly reversed.

Of course, the sharp rise in stock prices has raised concerns among some that valuations have become too high. This is particularly acute for companies related to artificial intelligence, as there is uncertainty about whether this technology can deliver on its promises. The market's embrace of a Trump victory overlooks the risks posed by his tariffs and tax cuts, which could reignite inflation and hinder global trade But very few people are calling for an end to this celebration. In fact, among the 19 strategists tracked by Bloomberg, none expect the S&P 500 index to decline next year. Even the lowest forecast believes the benchmark will remain stable; the most optimistic index is 7,100 points, indicating a 19% increase.

The S&P 500 index has had an annual return of at least 20% for two consecutive years.

Deutsche Bank's Chief U.S. Equity and Global Strategist Binky Chadha has been one of Wall Street's bulls for the past three years. He is most optimistic about a target of 7,000 points by 2025, reflecting his expectations for sustained economic growth and low unemployment. He said he is not worried about missing opportunities.

He stated that predicting the market means "looking year by year." "Typically, the stock market will pull back 3% to 5% every two to three months. Does this mean you shouldn't buy stocks? No, you should buy because they will rebound."