Yahoo Finance Stocks’ Relentless Rally Makes Bears Endangered on Wall Street
(Bloomberg) -- The economy is growing, lower interest rates are on the horizon, artificial intelligence technology is set to create a utopia of corporate efficiency, and nothing can stop the soaring stock market.
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At least that’s how most of Wall Street’s soothsayers now see things.
After being burned last year by doom-and-gloom calls that failed to materialize, equities strategists can’t turn bullish fast enough, making bears a rarity as the S&P 500 Index keeps setting new records. And to the few remaining skeptics, this kind of halcyon-laced groupthink is a key reason to be cautious about the stock market in this euphoric moment.
“It’s not just the excessive valuation,” said David Rosenberg, founder and president of Rosenberg Research. “It’s the market sentiment, the complacency, the extraordinary popular delusions of maddening crowds.”
The key is earnings, according to Rosenberg, who correctly predicted the 2008 crash. If they start to disappoint and fail to match the lofty expectations baked into stock prices, he expects the market to buckle. What’s more, the rapid rise in share prices and high concentration risk mean that a shock could come “out of the blue, for no reason in particular,” he said.
No Fear
Yet so many equity strategists no longer seem bothered by risk. The highest year-end target for the S&P 500 is 6,000 from Evercore ISI’s Julian Emanuel, who just recently was warning of an imminent drop in equities. Goldman Sachs Group Inc. and UBS Group AG have raised their market outlooks three times since late last year. Even Morgan Stanley’s celebrity strategist Mike Wilson has stopped delivering the bearish warnings he came to be known for.
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“If there seems to be a lot of optimism, it stems from the market’s perception that recession risk, or default risk, or the risk of companies going bankrupt, or any of these bad outcomes has declined and continues to decline,” UBS chief US equity strategist Jonathan Golub said. “That should naturally cause valuations to drift higher, and it’s not speculative — it’s a natural, proper response to a shifting views on the economy.”
To that point, the Atlanta Fed’s GDPNow model projects the real US gross domestic product will climb by a 3.1% annual rate in the second quarter, up from 1.3% in the first quarter.
Pessimists, however, say that the impact of higher interest rates hasn’t fully reached the labor market, businesses and consumers, and that could weigh on growth later this year and into 2025 as the Federal Reserve keeps borrowing costs higher for longer than expected. JPMorgan Chase & Co.’s Marko Kolanovic, stands alone among megabank strategists in flagging this risk.
Of course, Kolanovic has been wrong before, staying bullish in 2022 as the S&P tumbled 19% and sticking with his bearish view in 2023 as the equities benchmark soared 24%. He’s remained a pessimist this year in the face of the continuing rally, sounding the alarm on a variety of issues including an increase in unemployment over the past year, a drop in home sales, and a yield curve inversion that’s lasted almost two years.
“It is possible, but historically and statistically unlikely, that this time is different and that high valuations of risk assets are justified,” he said in a note to clients earlier this month.
Investors Unfazed
Investors also seem unfazed. The latest global fund manager survey from Bank of America Corp. showed respondents are the most bullish since November 2021, with cash levels in money-market funds at a three-year low.
The optimism is coming from two places: enthusiasm for AI technology and hopes the Fed will engineer a soft landing, according to Peter Berezin, chief global strategist at BCA Research, who thinks these reasons are misguided. The timeline for AI adoption remains uncertain, while monetary policy could still crack the labor market, he said.
“We like to be contrarians,” Berezin said. “Not for the sake of being contrarians, but because often the consensus is wrong.”
Berezin has the second lowest year-end S&P 500 forecast among strategists tracked by Bloomberg at 4,250 — only Kolanovic is lower at 4,200. The gauge is currently nearing the 5,500 mark. What does he think it will take for such a drop to happen? A recession and a cut in earnings estimates, he said.
The 43% spread between the highest and lowest year-end targets from Evercore and JPMorgan, respectively, is the second largest in the past 15 years among any surveys of strategists conducted by Bloomberg in June. The only time that Wall Street views were more split at this point of a year was in 2023.
That said, history appears to side with the optimists. The average bull market lasts almost six years and the S&P 500 posts a return of 192% during that time, while the bear markets span around 16 months and post drawdowns of 34%, according to data from Edward Jones. So time may be a friend of the bulls for now, said Mona Mahajan, senior strategist at the firm. While she acknowledges that the market is likely due for a correction, she also said there isn’t much to signal that it will become dire.
“We probably do need a period of consolidation to just consolidate some of these gains, maybe even take some profits,” she added. “But we don’t think it’ll turn into something more nefarious.”
--With assistance from Lu Wang.
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