Stock Bears Are Going Extinct. Time To Worry?

Every year, financial experts on Wall Street start looking ahead to predict the direction of U.S. stocks over the next twelve months. This time last year, the outlook was rather gloomy, with many analysts surprised by the S&P 500’s impressive 23% growth in 2024. Back then, most analysts expected the market to stagnate or even decline. This pattern of overly cautious predictions was evident the previous year as well. In hindsight, these overly pessimistic views could be seen as a contrarian bullish indicator.

However, the mood has noticeably shifted this year. The average strategist now forecasts that the S&P 500 Index will reach 6,600 by the end of 2025, indicating an expected growth of 12% from current levels. The formerly bearish analysts appear to have shifted their views, with only a couple still expecting a downturn, including the prominent bear, Peter Berezin from BCA Research.

This optimism, while seemingly justified given the remarkable two-year rally in the S&P 500, raises important questions about potential risks ahead. From a psychological standpoint, this can reflect a behavioral bias known as recency bias, where recent positive trends disproportionately influence future expectations. Yet, there also exist solid economic reasons for this brighter outlook, making it unwise to dismiss this sentiment as mere psychology.

The hype around generative artificial intelligence, which began in 2022, has proven to be more than a passing trend. It has led to significant capital expenditures and explosive revenue growth for companies like Nvidia. Along with the success of the so-called Magnificent 7 tech companies, which include industry titans like Apple and Microsoft, there has been a paradigm shift in how sell-side analysts perceive the market. These companies, representing a third of the S&P 500 by weight, have become efficient, diversified powerhouses for cash generation.

Moreover, the U.S. economy stands out as a leading force among developed markets, achieving growth driven by productivity, a feat not seen since the early 2000s. Despite various doomsday scenarios, consumption and labor market statistics remain encouraging, with inflation rates surprisingly easing as well.

However, this bullish sentiment carries its own set of risks. First, when nearly everyone is betting on the market to rise, one must wonder who will be left to invest further. While it doesn't seem we've yet hit the saturation point, we might be approaching it. Additionally, the portfolios of many investors have become heavily reliant on the same top-performing stocks, and their valuation has escalated to levels that may already be factoring in many of their future successes. While analysts still mark their growth outlook as "great," it has noticeably dipped from the extraordinary range seen previously.

Although there need to be certain catalysts like a rise in inflation, escalated U.S.-China trade tensions, or a potential downturn in AI growth, it’s vital not to underestimate these risks.

Additionally, Berezin, the most pessimistic strategist in the data collected, hinges his outlook on the forecast of a U.S. recession. He raises concerns about possible trade wars instigated by political figures, which could diminish business investments, along with a potential backlash in the bond market due to government-funded tax cuts. He cautions that such scenarios could align with rising credit card and auto loan delinquencies. Berezin commented, “I’m not a perma-bear; this time it’s different. The market truly needs to hear a sober, cautious voice as such perspectives are rare these days.”

It’s crucial to consider these twelve-month stock projections as educated guesses at best. Analysts have rightly observed that, historically, stocks tend to rise over time, and thus most predictions generally lean positive. Yet, history shows that the average point forecast often lacks precision and can sometimes be entirely off the mark.

For instance, experts maintained a relatively optimistic outlook during the dot-com bust and before the 2008 financial crisis. More recently, they misjudged the market’s behavior in the bear market of 2022 and did not predict the stellar years of 2023 and 2024. Predicting market movements is an incredibly challenging task, so while opponents of these forecasts may be skeptical, many would still advocate for investment strategies focusing on risk management and emerging themes.

Overall, the prudent course of action seems to involve remaining invested, while also hedging risks through a mix of bonds, options, and stable equities. Stocks typically trend upward, and there are indeed favorable elements for 2025. Yet, the last few years have illustrated that unpredictable market shifts can and do happen, making it vital to remain cautious and attentive.

Stocks, Bulls, Risk