Wall Street’s ‘crystal ball’ erupts as stocks stage big rally

(Bloomberg) — As the trillion-dollar AI rally gathers pace, have mercy on the humans on Wall Street trying to figure out this gravity-defying market.

Bloomberg’s Most Read

With the S&P 500 index posting an improbable 16% gain this year, being both bearish and fake makes life difficult for people paid to predict where stocks will go next. After being blindsided by the resilience of the US economy so far, humility is in order for sales pros who remain at loggerheads over what lies ahead.

Goldman Sachs Group Inc.’s David Kostin expects stocks to rise further, while Morgan Stanley’s Mike Wilson and JPMorgan Chase & Co.’s Marko Kolanovic warned investors to stay away. At Bank of America Corp., there’s disagreement under the same roof, with Savita Subramanian emerging as one of the most optimistic voices in the market as her colleague Michael Hartnett says further declines are ahead.

One thing is certain: the S&P 500 has already exceeded its end-of-year average price target. Strategists currently expect the benchmark to end 2023 just below 4,100, with Friday’s close at 4,450.38 leaving it 8.5% above that number. The last time the gauge traded above the consensus target like this was during the September 2020 pandemic craze, according to data compiled by Bloomberg.

No wonder some stock analysts seem a bit defensive, hoping their predictions will be confirmed soon enough as the Federal Reserve’s hawkish policy bites. Others hurl words of humility at clients, expressing their temptation to push targets higher as the names of tech megacaps soar.

Those who do it largely right let off steam, calling on naysayers to be too smart for their own good.

“The bears make you smart, but the bulls make you money,” said Brian Belski of BMO Capital Markets, who recently raised his year-end target to 4,550 from 4,300.

Narrow leadership, recession risk and downward earnings revisions are some of the top concerns voiced by skeptics. Moreover, in the second half of the year, something major could break in the markets, or in the consumption and investment cycle, which would justify those who are currently cautious about risky assets. Yet, at least for now, the market continues to rise and the data suggests the economy can avoid a recession.

“I’m definitely one of the investors who didn’t see it coming and didn’t expect it to last or go this far,” said Liz Young, SoFi’s head of investment strategy. “People who were cautious kind of look at the market and say, did I miss something?”

At Citigroup Inc., Scott Chronert points to “a lack of concrete support for the earnings review” by deciding not to raise his target.

“As appealing as it may be to follow the tape and push our year-end target higher, we just don’t see the fundamental rationale for this yet,” he said.

In these weird post-pandemic times — where the economic and market cycle upends conventional wisdom — bears who seemed like geniuses one quarter are likely to look like cranks the next. Meanwhile, those who gained fame betting on the tech boom are more than a little paranoid that their bullish outlook will look seething if things go wrong.

More generally, when it comes to stock calls, there are four quadrants: bullish, bearish, true and false, according to Adam Parker, former chief U.S. equity strategist at Morgan Stanley.

“The worst quadrant to be in when working at one of these companies is downside and wrong because you haven’t really activated your upside capture for clients,” said Parker, who now leads Trivariate Research. . “I’ve been there and lived in all four quadrants – it’s a tough place to live.”

Piper Sandler’s Michael Kantrowitz is feeling the heat. He still sees the S&P 500 plunging to 3,225 by the end of this year, the market’s darkest target. He has no intention of changing his outlook, just yet. In his view, recent upward revisions to strategists’ targets resemble the continuation of momentum in 2000 and 2007, when he says sellers pushed investors past a “proverbial bus.”

On the other hand, John Stoltzfus of Oppenheimer Asset Management Inc. is seeing better days. At one point last year, he predicted the S&P 500 would end 2022 at 5,330. It closed at 3,839.5. This year it entered with a target of 4,400 – and it plans to raise it pending further inflation and jobs data after the Fed skipped a rate hike in June.

When the market bottomed out in October, “what we think happened at that time was that a lot of the negative projection that had been emitted by the bears in 2022 has basically took anything that was wrong or uncertain and projected it into infinity,” he said. . “It happens in bear markets.”

Meanwhile, Parker says it makes more sense to be cautious than seven months ago, given the growing stretch in US equities and deteriorating credit. But suddenly changing one’s point of view risks undermining the credibility of a strategist’s framework.

“I just don’t think you ever want to be a perma-whatever,” he said. “Because the data changes, and I think you have to react and absorb the new data and integrate it into your thesis.”

–With help from Matt Turner, Mark Tannenbaum and Jessica Menton.

Bloomberg Businessweek’s Most Read

©2023 Bloomberg LP

Leave a Comment