A version of this story first appeared at TKer.co
It’s that time of year when Wall Street’s top strategists tell clients where they see the stock market heading in the year ahead.
The average forecast for the group tends to predict the S&P 500 climbing by about 10%, which is in line with historical averages. After two years of above-average gains, an average year is what most strategists expect.
The targets range from 6,400 to 7,007. This implies returns between +5% and +15% from Friday’s close. It’s a tighter range than last year’s targets, with many clustering in that 8%-10% return expectation.
Before we move on, I’d once again caution against putting too much weight into one-year targets. It’s extremely difficult to predict short-term moves in the market with any accuracy. Few on Wall Street have ever been able to do this consistently. DataTrek’s Nicholas Colas recently pointed out that the standard deviation around the mean annual total return for the S&P 500 is nearly 20 percentage points! More here.
I do however think the research, analysis, and commentary behind these forecasts can be very informative.
That said, here’s what’s driving Wall Street’s views for 2024:
-
Policy uncertainty is high… President-elect Donald Trump has proposed some aggressive changes to trade policy and business regulation. Some of these proposals, like new tariffs and tighter immigration, are expected to be headwinds to business, threatening to hinder demand while stoking inflation. This uncertainty has made it unusually difficult to forecast the coming year. Many strategists have been talking up bull-case and bear-case scenarios in addition to their base-case target.
-
… but the downside could be limited. Experts aren’t convinced we’ll get the worst of Trump’s proposals. Rather, they see them as opening bids for what will be much more benign policies. Furthermore, strategists believe the tailwinds that come from lower tax rates and deregulation to offset any potential headwinds.
-
The economy is expected to keep growing. Growth may not be as hot as it was earlier in the recovery as job creation cools and household finances normalize. But growth is still growth, which is good for the top line. A less hawkish Federal Reserve helps.
-
Profit margins are expected to rise. Companies have yet to fully realize the actions taken in recent years to make operations more efficient. This includes strategic layoffs and hirings, changes to work-from-home policies, and upgrades to technology. Even modest sales growth could translate into significant margin gains thanks to positive operating leverage. Lower inflation should help on the cost front, but this could change depending on how trade policy evolves.
-
Earnings growth is expected to broaden out. Much of the current bull market has been driven by the Magnificent 7 stocks as those companies’ earnings growth has been white hot. Analysts currently expect the “other 493” names in the S&P to generate better earnings growth as growth from the Mag 7 cools.
-
Valuations are high, but… Strategists across the board acknowledge high valuations don’t necessarily mean weak returns over the next year. Still, they believe they limit upside potential. Price growth in 2025 will be less about valuations expanding and more about earnings growing.
