Wall Street realizes how wrong this has been in 2023

Wall Street realizes how wrong this has been in 2023
Wall Street realizes how wrong this has been in 2023

(Bloomberg) — Stock strategists who were wildly wrong about this year’s rally are finally starting to realize their mistake, raising year-end targets for the S&P 500 index.

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Take Societe Generale’s Manish Kabra, who last week raised his year-end target on the index to 4,750 from 4,300, 25% above his initial target of 3,800 heading into 2023. Or Michael Kantrowitz of Piper Sandler & Co. and Greg of BNP Paribas SA. Boutle, who at 3,225 and 3,400 held the lowest targets among sell-side forecasters. They have been forced to raise their 2023 outlook in recent months, simply to keep pace with this year’s 15.9% rise.

And then there’s Morgan Stanley’s Mike Wilson, a stalwart bear, who admitted in July that he had been pessimistic for too long. But he still expects U.S. stocks to fall more than 10% by the end of the year.

“Groupthink and psychology are the primary driver of strategists’ behavior,” said Adam Sarhan, founder of 50 Park Investments. “So many strategists have been wrong for so long this year, and many have been forced to adjust their targets as they try to catch up with the stock market.”

Even though strategists have largely capitulated on their 2023 forecasts, they’re not quite ready to turn into bulls. Kabra, for example, expects the S&P 500 to fall to 3,800 by the middle of next year, due to a consumer spending crisis. It closed Friday at 4,450 hours.

He is not alone. Strategists broadly forecast a market slowdown in 2024, even as signs grow that the U.S. economy may avoid a recession: the inflation rate has broadly cooled, retail sales remain strong and the Federal Reserve is expected to keep interest rates stable this week.

For investors with money on the line, the gloom on Wall Street creates a dilemma. This reminds us that the Fed’s efforts to control inflation still threaten the economy. At the same time, stocks have weathered the same threats in 2023 and now, with the earnings outlook for U.S. companies improving and the Fed itself seeing no signs of recession, some market watchers are concluding that the bears will still be wrong.

Different pressures

For Sarhan, a stock bull who favors technology and growth stocks, it all shows how different the stakes are for those who monitor the market — like strategists — and those who manage clients’ money.

“The pressure is extremely different as a fund manager,” he said. “Not only do you have to be right, but you also have to beat the market or customers will leave you.”

Many Wall Street strategists were forced to raise their forecasts as stocks extended their gains this year. Savita Subramanian of Bank of America Corp., David Kostin of Goldman Sachs Group Inc. and Scott Chronert of Citigroup Inc. have also upgraded their 2023 outlooks in recent months to track the rally.

“One could argue that everyone who raises their estimates and adjusts their market forecasts isn’t necessarily wrong, they’re just ahead of it,” said Oliver Pursche, senior vice president and advisor at Wealthspire Advisors. “Listening to someone you disagree with is far more valuable than simply seeking confirmation bias from someone else who sees the market the same way you do.”

As the Fed nears the end of its tightening cycle, Pursche is optimistic about the stock market and the economy as the earnings outlook improves and spending remains robust.

Risks remain

But that doesn’t mean there aren’t risks.

Fed officials have indicated they are prepared to raise borrowing costs again if the economy and inflation do not slow further. There is also a proven signal coming from the bond market, which has not sounded the alarm of a recession in such a long time.

Perhaps the biggest question on much of Wall Street’s mind at this point is how long the Fed will keep rates this high, if indeed it eventually raises them. Economists polled by Bloomberg expect authorities to keep rates in a range of 5.25% to 5.5% at their meeting on September 19-20, with the first cut coming in May, or two months later than the opinion of economists in July.

Read more: Fed eyes further rate hike, rate cuts for 2024

Historically, timing when the Fed ends its hikes has generated double-digit returns for stock investors, but the trajectory becomes murky when the central bank jumps before resuming its hikes.

There are signs that investors have money to invest in stocks. While investor exposure in July appeared stretched after stocks’ strong advance in the first half, it is now considerably closer to neutral, according to data compiled by Deutsche Bank AG.

It appears that some of this money is being misappropriated. Stock funds just experienced the biggest weekly inflow in 18 months, driven by growing confidence that the economy is headed for a soft landing, according to Bank of America.

“No one thought the recovery would go this far and this fast,” said Stephanie Lang, chief investment officer at Homrich Berg, who has been underweight stocks all year. “What will be telling is if most strategists turn around, but then comes more of the economic weakness that already worries some.”

–With the help of Lu Wang.

(Update performance in second paragraph.)

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