By Isabel Wang
Wall Street strategists are bracing for below-average returns after a forecast-defying 2023 rally
It's that time of year when Wall Street's top economists and strategists issue a steady stream of outlooks, explaining where they see the stock market heading in the year ahead.
But predicting 2024 could be extra difficult after a robust and forecast-defying 2023 that's left investors to worry over whether U.S. stocks can build on their gains as interest-rate and inflation threats linger.
Top Wall Street investment banks, brokers and research firms largely expect U.S. stocks to continue rising, but largely forecast returns to remain far below average for the S&P 500 SPX next year, according to several forecasts viewed by MarketWatch this month.
On Monday, Deutsche Bank and BMO Capital Markets strategists set some of Wall Street's most bullish 2024 targets, with each predicting the benchmark index to hit 5,100 by the end of next year and eclipse its record close of 4,796 set in January 2022. That would be a roughly 12% advance from Monday's close of 4,550, according to FactSet data.
Last week, RBC Capital Markets strategist Lori Calvasina and Bank of America's Savita Subramanian also joined the bullish club in adopting 5,000 as their year-end target for 2024, citing reasons including positive sentiment in the stock market, fading geopolitical risks, cooling inflation and the end of the Federal Reserve's rate-hiking cycle, among others.
See: Stock investors must 'go against the grain' in 2024 'trader's market,' Wells Fargo says
It is worth noting that not just the market's leading bulls sound more optimistic than last year, some doomsayers, such as Morgan Stanley's chief equity strategist Michael Wilson, also sees the S&P 500 end at 4,500 next year, implying a merely 1.1% drop from where it settled Monday.
Last year's plunge in the U.S. stock market made the staunch bear Wilson the most celebrated stock forecaster on Wall Street, but it is a role he has failed to reprise in 2023 as stocks have rallied, powered by just a handful of the biggest technology names and expectations that the central bank is done raising rates to curb inflation.
See: Investors beware: 'Magnificent Seven' are starting to resemble 'Nifty 50' stocks that got crushed in the 1970s market crash
The estimates from sell-side strategists put the average target for the S&P 500 at 4,836 for the end of 2024, implying an advance of merely 6.3% from Monday's close, according to MarketWatch calculations of the data (see table below). That is below the average yearly return of around 8% for the large-cap index since 1957 and its year-to-date surge of 18.5% in 2023, according to Dow Jones Market Data.
Not every bank has so far published its target.
Wall Street firm 2024 S&P 500 target Deutsche Bank 5100 BMO Capital Markets 5100 RBC Capital Markets 5000 Bank of America 5000 Barclays 4800 Goldman Sachs 4700 UBS Global Wealth Management 4700 Wells Fargo Securities 4625 Morgan Stanley 4500 Average 4836 Median 4800 Source: MarketWatch
Tim Urbanowicz, head of research and investment strategy at Innovator ETFs, said investors have to process Wall Street forecasts with caution and put price targets in the context of what has already happened in the stock market so far.
His team projects the S&P 500 index to finish at 4,753 at the end of 2024, representing an upside of just 4.5% from current levels as valuations will contract to better reflect higher-for-longer interest rates and positive earnings growth.
"If I were to summarize what we see, it's really a choppy, volatile market that doesn't really end up going far at all [next year]," Urbanowicz told MarketWatch via phone on Tuesday. "That's why even in this positive scenario which we keep playing out [in 2023], it doesn't necessarily mean there's huge, huge upside."
To be sure, investors should already be ready to take forecasts with a grain of salt. Wall Street strategists broadly failed to predict the stock-market rally this year, with their median target being around 11% off from the current levels for the S&P 500 by the end of 2022, according to data compiled by MarketWatch.
"We definitely find value in having the baseline view as a reference point, but what's more important is really understanding the risks to the view on both the downside as well as the upside, and really making sure you're building a portfolio that can not only just capitalize the base you played out but also cover a wider range of outcomes," he said.
See: Betting on Wall Street's market forecasts predicts trouble for your portfolio
Wall Street might be too bearish for 2024
With most forecasts from Wall Street strategists suggesting a flat or single-digit returns next year, history suggests otherwise. Since 1900, the historical distribution of yearly S&P 500 returns shows stocks advancing 10% or more 51% of the time, while booking returns between 0% and 5% in 11% of the time, according to data compiled by Tom Lee, head of research at Fundstrat Global Advisors.
"The point we are making is that flat S&P 500 is the least likely outcome with only a 1 in 10 chance of happening," said Lee in a Tuesday note. "Yet, that is the expectation of the sell-side and also of investors. To me, that is why 2024 will be a very decisive year."
Fundstrat hasn't released its S&P 500 year-end price target for 2024.
U.S. stocks were trading higher on Tuesday after a Federal Reserve official said signs of a slowdown in the economy could help cool inflation to the central bank's 2% target. The Dow Jones Industrial Average DJIA was rising 0.3%, while the S&P 500 and the Nasdaq Composite COMP was each advancing 0.1%, according to FactSet data.
-Isabel Wang
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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11-28-23 1437ET
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