After a roaring 2023, stocks have gotten off to a great start in 2024 as well.
The S&P 500 (SNPINDEX: ^GSPC) jumped 10% in the first quarter, marking its best performance for the quarter since 2019, and the Nasdaq Composite was close behind with a 9% gain.
Stocks are keeping the momentum going from a surge in the last two months of 2023. They’ve continued to climb on enthusiasm for the AI revolution and strong earnings reports. The Federal Reserve has also continued to predict three interest rate cuts this year, which would help grease the economy and make stocks more attractive compared to bonds.
However, Wall Street isn’t so sure the rally will continue. Of 15 Wall Street price targets, the consensus calls for the broad-market index to finish the year at just 5,062, or a 2% decline from its close on April 4. Of those 15 analysts, seven see the S&P 500 declining from here, and the price targets range from JPMorgan at 4,200 to Oppenheimer at 5,500.
In other words, the fireworks that have led the stock market higher after the last several months are expected to come to an end, at least according to some of these analysts.
Let’s take a look at a few of the reasons why Wall Street expects a muted performance over the rest of the year.
Valuations are getting stretched
Several Wall Street analysts believe the “Magnificent Seven”-driven rally is getting fatigued.
JPMorgan Asset Management CEO George Gatch noted the price-to-earnings (P/E) ratio on the Magnificent Seven was around 30 in mid-March, and the overall index is well above its historical P/E average of 15.7 at 23.3.
The top stocks are also trading at unusually high valuations. Microsoft, for example, is trading at a price-to-earnings ratio of 38. At that valuation, high expectations are baked into the stock, and it would be easy for it to fall if quarterly results don’t live up to those expectations. Similarly, any further gains in the stock are likely to come from increasing earnings rather than multiple expansion.
Other top stocks like Apple, Nvidia, and Amazon also look expensive, meaning they’re also set to fall if they don’t live up to expectations.
Rate cuts might not happen
A significant part of the bull case for stocks is also based on interest rates falling. The Federal Reserve has forecast three interest rate cuts this year, and Fed Chair Jerome Powell has stuck to that forecast.
However, inflation remains above the Fed’s target. The labor market has been strong as well. That’s led to market prognosticators growing more skeptical about three rate cuts happening, as the Fed typically lowers interest rates to shore up a weakening economy.
If rate cuts don’t happen or there are fewer than three, stocks could fall as investors adjust their expectations.
Geopolitical uncertainty
There’s never a time when geopolitical uncertainty isn’t a risk, but arguably, there’s more uncertainty around the world right now than usual. Two wars are raging with no signs of ending, and tensions with China are mounting. Meanwhile, much of the world is still recovering from post-pandemic inflation and a “cost-of-living crisis.” Finally, a major U.S. election hangs in the balance this year.
Any of those events have the potential to throw the current bull market off track, and they can also dissuade the Fed from lowering interest rates as well.
Time to sell your stocks?
Before you make any moves based on the above warning signs, you should remember many of these analysts’ price targets will move higher, especially if the market keeps gaining. Some of them, like JPMorgan’s, were made before 2024 started.
That doesn’t necessarily mean they’re out of date, but they don’t reflect the most recent market performance and conditions.
Additionally, a 2% decline from current levels isn’t any reason to panic even if the consensus estimate proves accurate. The S&P 500 would still gain about 6% for the year based on that consensus.
Wall Street has also been behind the curve on the bull market since it started, and many of these analysts wrongly predicted a recession.
It’s worth considering the rationale behind Wall Street forecasts, but you should still be making your own decisions with a long-term focus. There’s no reason to sell your stocks just because Wall Street’s tilting bearish.
