Analysts Surprised by S&P 500’s 2024 Surge despite Expected Slowdown

As strategists from major firms like Bank of America Corp, Deutsche Bank AG, and Goldman Sachs Group Inc put forth their predictions for 2024, a general agreement emerged: Following a remarkable surge of over 20% fueled by advancements in artificial intelligence and an economy that defied pessimistic expectations, the S&P 500 Index was likely to achieve only a modest gain.

With the US Federal Reserve transitioning to interest rate cuts, Treasuries were regarded as potentially competing with equities.

Instead, Wall Street analysts faced yet another humbling episode, having been caught off-guard by the market’s fluctuations since the pandemic’s conclusion.

Equity prices did not lose momentum; they continued to rise.

By late January, the S&P 500 had already exceeded the average year-end target set by strategists. It subsequently reached record highs and is on track for a 25% increase in 2024, marking the strongest consecutive annual performance since the late 1990s dot-com bubble.

“There is an element of miraculousness to it,” remarked Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, who revised his mid-year forecast of a slight dip for the S&P 500, becoming the first major strategist to target a year-end level of 6,000. “Trends can persist longer and reach heights beyond imagination.”

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The persistence of this trend highlights the post-pandemic economy’s unexpected resilience, continuing to grow even as the Fed raised interest rates to levels unseen in over 20 years.

As 2023 drew to a close, with bonds soaring on speculation of aggressive policy easing by the central bank, fixed-income strategists had forecast the benchmark 10-year Treasury yield to fall to around 3.8%. Instead, it climbed to surpass 4.6%.

This economic strength has bolstered corporate profits, fueling the rise of the stock market. Simultaneously, enthusiasm for AI has propelled the shares of leading tech companies such as Alphabet Inc, Amazon.com Inc, Apple Inc, Meta Platforms Inc, and Nvidia Corp.

The rally received an additional boost from Donald Trump’s presidential victory, which brought promises of tax cuts and corporate-friendly policies.

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This shift has largely diminished bearish sentiment on Wall Street, leading some strategists to abandon their pessimistic outlooks.

Morgan Stanley’s Mike Wilson, who had consistently warned in 2023 that equities were likely to fall, turned optimistic on stocks by May. Meanwhile, JPMorgan Chase & Co’s Marko Kolanovic, who predicted a 12% drop in the S&P 500 by December, left the bank in mid-2024 after two decades. In late November, Dubravko Lakos-Bujas, who now leads JPMorgan’s market research team, revised his previously bearish target, forecasting continued growth for the S&P 500 next year.

Lakos-Bujas noted that some of the team’s miscalculations were due to the unexpected surge of the so-called Magnificent Seven tech stocks, which have played a significant role in the S&P 500’s gains. However, he pointed out solid reasons for optimism moving forward, including a more accommodating Fed, political changes in Washington, and a proactive Chinese government looking to sustain economic growth.

“We effectively have three safety nets in place,” Lakos-Bujas said, anticipating the S&P 500 to reach 6,500 next year, representing a gain of around 9% from Friday’s levels. This has “shifted our strategic thinking regarding risky assets and equities.”

It wasn’t just the pessimists who were caught unaware. Almost every top strategist followed by Bloomberg revised their S&P 500 targets upwards at least once this year after the index consistently exceeded expectations.

When the targets were first made public in late 2023, even the most bullish forecasters at the time, like Fundstrat’s Tom Lee and Oppenheimer’s John Stoltzfus, anticipated only a modest 9% increase in the S&P 500 to approximately 5,200 — a target the index surpassed in less than three months.

There were moments when the stock market appeared poised for a downturn, but these proved fleeting. Although the S&P 500 experienced a decline from mid-July to early August, it quickly resumed its upward trajectory as concerns about tech earnings subsided. A selloff triggered by Fed Chair Jerome Powell’s hawkish commentary this month was also swiftly reversed.

The steep climb has raised concerns that valuations may have become overly stretched, particularly for companies linked to AI, amid uncertainties about the technology’s long-term efficacy. Additionally, the market’s optimistic view of Trump’s victory overlooks the potential risks posed by his tax and tariff strategies, which could reignite inflation and hinder global trade.

However, very few are predicting an end to the rally. In fact, none of the 19 strategists monitored by Bloomberg anticipate a decline in the S&P 500 next year. Even the most conservative forecast predicts the benchmark will remain stable; the most optimistic outlook, set at 7,100, suggests a 19% rise.

Binky Chadha, chief US equity and global strategist at Deutsche Bank, has maintained a bullish stance on Wall Street for the past three years. His target for 2025, set at 7,000 points, reflects his belief in sustained economic growth and low unemployment. He expresses confidence in not being caught off guard.

Forecasting the markets requires adopting a “one year at a time” approach, he noted. “Typically, equities will experience pullbacks of 3% to 5% every two to three months. Does that mean you shouldn’t invest in equities? No, you should, because they will rebound.”

© 2024 Bloomberg

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