Wall Street reckons with what went wrong in 2023

By | September 17, 2023

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

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Take Société Générale’s Manish Kabra, who last week raised his year-end target on the index to 4,750 from 4,300, or 25% higher than his original forecast of 3,800 ahead of 2023. Or Piper’s Michael Kantrowitz Sandler & Co. and BNP Paribas SA’s Greg Boutle, who at 3,225 and 3,400 had held the lowest targets among sell-side forecasters. In recent months they have been forced to revise their outlook for 2023 just to keep pace with this year’s 15.9% rally.

And then there’s Morgan Stanley’s Mike Wilson, a brave bear, who admitted in July that he had been pessimistic for too long. Although he still expects US stocks to decline more than 10% before the end of the year.

“Groupthink and psychology are the main drivers of strategists’ behavior,” said Adam Sarhan, founder of 50 Park Investments. “So many strategists have been wrong for so long this year, so many have been forced to revise their goals in an attempt to catch up with the stock market.”

While strategists have largely capitulated on their 2023 predictions, they are not yet ready to turn bullish. Kabra, for example, expects the S&P 500 to fall to 3,800 by the middle of next year, due to the crisis in consumer spending. It closed at 4,450 on Friday.

He’s not alone. Strategists generally expect a market downturn in 2024, even as signs grow that the U.S. economy may avoid a recession: the inflation rate has cooled overall, retail sales remain strong, and the Federal Reserve is expected to maintain interest rates stable this week.

For investors with money on the line, Wall Street’s gloom creates a dilemma. This reminds us that the Fed’s efforts to tame inflation continue to threaten the economy. At the same time, stocks have overcome the same threats in 2023, and now, with Corporate America’s profit outlook improving and the Fed itself seeing no signs of recession, some market watchers are concluding that the bears will be wrong again time.

Different pressures

For Sarhan, a stock bull who favors technology and growth stocks, it all points to how the stakes are different for those who monitor the market – such as strategists – and those who manage client money.

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

A slew of Wall Street strategists have been forced to raise their forecasts as stocks have continued their climb this year. Bank of America Corp.’s Savita Subramanian, Goldman Sachs Group Inc.’s David Kostin and Citigroup Inc.’s Scott Chronert have also upgraded their 2023 outlooks in recent months to keep pace with the rally.

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

With the Fed nearing 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.

The risks remain

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

Fed officials have signaled they are prepared to raise borrowing costs again if the economy and inflation do not cool further. There is also a tried and true signal coming from the bond market, which has never sounded the alarm of recession for so long.

The main question plaguing much of Wall Street at this point may be how long the Fed will keep rates this high, if it actually proceeds to hike. Economists polled by Bloomberg expect officials to keep rates between 5.25% and 5.5% at their Sept. 19-20 meeting, with the first cut coming in May, two months later than economists forecast July.

Read more: The Fed has forecast further increases and rate cuts for 2024

Historically, pinning the moment when the Fed ended hikes has produced double-digit returns for equity investors, but the trajectory becomes murky when the central bank jumps before resuming hikes.

There are signs that investors have money to invest in stocks. While investor exposure in July appeared borderline after the big rally in stocks in the first half of the year, it is now significantly closer to neutral, data compiled by Deutsche Bank AG shows.

It looks like some of that money could be set aside. According to Bank of America, stock funds just recorded their largest weekly inflow in 18 months on growing confidence that the economy is headed for a soft landing.

“Nobody thought the rally would come this far and this fast,” said Stephanie Lang, investment director at Homrich Berg, who has been underweight stocks all year. “What will be significant is if most strategists turn around, but then comes more economic weakness that some are already worried about.”

–With assistance from Lu Wang.

(Update performance in second paragraph.)

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