(Bloomberg) – As AI's trillion-dollar rally gathers momentum, pity the people of Wall Street trying to make sense of this gravity-defying market.
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With the S&P 500 Index set to post an improbable 16% gain this year, people who are paid to predict where stocks will go next are finding it hard to be both pessimistic and wrong. Having been surprised so far by the resilience of the US economy, humility is the order of the day for the sales professionals who remain divided about what lies ahead.
Goldman Sachs Group Inc.'s David Kostin expects shares to keep rising, while Morgan Stanley's Mike Wilson and JPMorgan Chase & Co.'s Marko Kolanovic have warned investors to stay away. At Bank of America Corp. There is disagreement under the same umbrella, with Savita Subramanian emerging as one of the most optimistic market voices, while colleague Michael Hartnett says another downturn is imminent.
One thing is certain: The S&P 500 has already exceeded its average price target at the end of the year. Currently, strategists expect the benchmark to end 2023 just below 4,100, with Friday's close at 4,450.38, up 8.5% from that level. According to data compiled by Bloomberg, the last time the index beat the consensus target in pandemic mania was in September 2020.
No wonder some equity analysts are sounding a little dovish, hoping that their forecasts will soon be confirmed when the Federal Reserve's tightening policy takes hold. Others express humbleness towards their customers and express a temptation to aim higher as tech megacap names soar.
Those who get things largely right are blowing off steam, accusing the critics of being too smart for their own good.
“Bears make smart – but bulls make money,” said Brian Belski of BMO Capital Markets, who recently raised his year-end target to 4,550 from 4,300.
Tight leadership, recession risk and downward earnings revisions are some of the key concerns raised by skeptics. Additionally, something big could break in the markets or in the consumption and investment cycles in the second half of the year – vindicating those currently cautious about risk assets. But for now, at least, the market continues to rise and the data suggests the economy is avoiding a recession.
“I'm certainly one of those investors who didn't see it coming and didn't expect it to last or go this far, even at the beginning,” said Liz Young, SoFi's head of investment strategy. “People who have been cautious look at the market and ask themselves, ‘Am I missing something?'
At Citigroup Inc., Scott Chronert points to “a lack of concrete support for earnings revisions” when he decided not to raise his target.
“As tempting as it may be to follow the band and move up our year-end target, we just don't see a fundamental justification for it yet,” he said.
In these strange post-pandemic times – when the economic and market cycle is turning conventional wisdom on its head – bears who seemed like geniuses in one neighborhood risk looking like cranks in the next. Meanwhile, those who have made their names betting on the tech boom are more than a little paranoid that their optimistic outlook will look bubbly if things go wrong.
Broadly speaking, there are four quadrants to stock market sentiment: bullish, bearish, true and false, according to Adam Parker, former chief US equity strategist at Morgan Stanley.
“The worst quadrant you're in working at one of these companies is bearish and wrong because you haven't really enabled customers to make a profit,” said Parker, who now leads the trivariate research. “I've been there and lived in all four quadrants — it's a tough place.”
Piper Sandler's Michael Kantrowitz is feeling the heat. He still expects the S&P 500 to drop to 3,225 by the end of this year, the bleakest target yet. He has no plans to change his attitude for the time being. In his view, the recent upward revisions in the strategist's targets are similar to chasing momentum in 2000 and 2007, when he said the sell-side pushed investors in front of a “literal bus”.
On the other hand, Oppenheimer Asset Management Inc.'s John Stoltzfus is enjoying better days. Last year, he once predicted that the S&P 500 would end 2022 at 5,330 points. It closed at 3,839.5. It started this year with a target of 4,400 – and it's pondering a hike while awaiting more inflation and jobs data after the Fed refrained from raising rates in June.
As the market bottomed in October, “in our view, much of the negative forecast the bears made for 2022 is essentially anything that was wrong or uncertain, projected to infinity,” he said. “That's what happens in bear markets.”
Meanwhile, Parker says that with US stock prices rising and credit ratings deteriorating, it makes more sense to be more cautious than we were seven months ago. But an abrupt change of mind risks undermining the credibility of the strategic approach.
“I just don't think you ever want to be a hit,” he said. “Because data changes, and I think you need to act on the new data, absorb it and build it into your thesis.”
– With support from Matt Turner, Mark Tannenbaum and Jessica Menton.
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