The Bear POV: Amid All the Good Feelings, What Could Go Wrong?

The S&P 500 is nearing its peak, but here is the case made by several prominent Wall Street seers for why things can go awry.

The prospects are good for the stock market. The S&P 500 has advanced almost 20% this year and is close to reaching the all-time high attained in January 2022—the index needs to rise 4.2% more. Odds are that interest rates have peaked and may fall, always a plus for equities. What’s more, December is historically the best month for stocks (the S&P is up 0.8% this month thus far). Bank of America, RBC Capital Markets and Deutsche Bank Group are among the investment firms predicting a good 2024.

What could spoil the widespread upbeat outlook? Warning notes have come from several quarters, ranging from perma-bears like Morgan Stanley’s Mike Wilson to more nuanced views, such as from Goldman Sachs.

Dubravko Lakos-Bujas, JPMorgan Chase & Co.’s chief global equity strategist, told Bloomberg that buoyant market pricing is fueled by an “unrealistic” Goldilocks scenario, with economic growth not too hot to stoke inflation and not too cold to stifle a bull market.

To Lakos-Bujas, a slowdown will lower corporate earnings, consumer pricing power will dwindle and profit margins will suffer. Further, he said, elevated stock multiples and investor crowding into popular stocks—e.g. the Magnificent Seven—at the expense of other names are imbalances that will propel a market fall. His firm expects the S&P 500 will slide 6.5% by year-end 2024.

To Wilson, Morgan Stanley’s chief U.S. equity strategist, the market’s 2023 rally, on the heels of its 2022 tumble, cannot last. Investors, excited by the prospect of lower rates, are too bullish and stocks are overbought, he warned in a research note. Expect “near-term volatility in both rates and equities” this month, he wrote.

Wilson conceded that the market might enjoy an uptick in early 2024 amid lingering optimism, but he contended that too much trust is placed on the Federal Reserve to aid the market in the long term. “At current prices, markets are now expecting a meaningful re-acceleration in growth that we think is unlikely this year, especially for the consumer,” Wilson declared. He added that soft economic data soon to be released “is not priced into many stocks and expectations.”

Barry Banister, a managing director and strategist at Stifel, Nicolaus who correctly forecast the market’s 2023 bounceback, is less sanguine about long-term results, when adjusted for inflation. He predicted in a note that stocks will be roughly flat until the early 2030s against a backdrop of reinflationary economic growth.

He described how he expects interest rates will stay high and thus crimp earnings, the lifeblood of stock appreciation.

While Goldman Sachs forecasted that the market should keep going up, it’s not by much: The S&P 500 should hit 4,700 by the close of 2024, still short of the 4796 peak, yet above the level of Friday’s close, 4604, in the firm’s view.

Why? Absent a recession next year, “markets are approaching the limits of what can plausibly be priced,” Praveen Korapaty, Goldman’s chief global rates strategist, maintained in a note. Investors are too optimistic about the Fed’s cutting rates in 2024, a key catalyst for what they see as a continued bull run, he wrote.

Certainly, it feels odd to be a pessimist in a large crowd of optimists.

“Almost everybody is bullish. So I don’t know,” JPM’s Lakos-Bujas said. “Maybe we’re the lone crazy people.”

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