Stock Bears Are Going Extinct. Time To Worry?

As the year wraps up, professionals on Wall Street are gearing up to forecast stock movements for the coming 12 months. Reflecting on last year's predictions, it is interesting to note that analysts underestimated performance significantly, as the stock market surged by 23% in 2024. Many expected a stagnant market or even a decline, but their predictions fell short, raising doubts about their forecasting skills.

Fast-forward to now, the mood among strategists has shifted dramatically. The median forecast for the S&P 500 Index places it at 6,600 by the end of 2025, indicating a potential gain of 12%. This year, bullish sentiment has taken center stage, while the number of bearish analysts has dwindled, with only two expecting the Index to fall below 6,000, including one noted skeptic, Peter Berezin from BCA Research. The remarkable run of the S&P 500 over the past two years has contributed to this newfound optimism, but it also raises caution about potential investor pitfalls in the upcoming year.

From a behavioral point of view, this swing toward positivity might highlight a case of recency bias — a psychological tendency to let recent events overly influence current expectations. However, there are also tangible factors driving this positive outlook. The excitement surrounding generative artificial intelligence that started in 2022 has solidified its role in the market, leading to significant investments and impressive revenue growth for companies like Nvidia Corp.. Additionally, the so-called 'Magnificent 7' tech firms, which now make up 33% of the S&P 500, have transformed how investment analysts view prospects for growth and stability.

Beyond individual companies, the U.S. economy has shown remarkable resilience compared to other developed markets. Growth driven by productivity has emerged, reflecting a robust labor market and consistent consumer spending despite earlier warnings of economic downturns. Notably, inflation has also seen a decline, further supporting a favorable economic environment.

However, with such widespread bullish sentiment come new risks. A major concern revolves around market saturation — when nearly everyone is optimistic, who else is left to buy? While it is unclear if we have reached this point, caution is warranted. Additionally, investors have concentrated their portfolios heavily in these same tech stocks, leading to inflated valuations that may already reflect the future growth potential. Analysts now suggest that growth expectations have shifted from extraordinary to merely 'great.' Even still, various external triggers, such as an inflation resurgence or geopolitical tensions, could provoke a market correction.

BCA's Berezin is among the rare bearish voices in this landscape. He postulates that an impending U.S. recession could be triggered by factors such as a potential trade war, rising credit card delinquencies, and a possible backlash in the bond market against government-funded tax measures. "I’m not a permanent bear; this is the first time I’ve felt strongly bearish in my career," Berezin remarked, emphasizing the need for a more sobering perspective amidst widespread optimism.

As previously mentioned, yearly stock forecasts are fundamentally educated guesses, and strategists have generally learned that stocks trend upward over time. Positive estimates are common, but they can often lack precision, leading to questionable guidance. Historically, analysts have been overly optimistic prior to major market downturns, underscoring their limitations in predicting economic crises or unexpected events.

An example of this is evident in the bullish sentiment that pervaded the market ahead of previous crashes, such as the dot-com bubble and the financial crisis of 2008. Also, strategists anticipated a positive year in 2022, only to witness the emergence of challenging conditions in the following years. It is clear that market predictions can be notoriously inaccurate.

With all these considerations, it might be wise to maintain investments in stocks while diversifying portfolios with options like bonds and less volatile equities. Generally speaking, stock markets have a tendency to rise over the long term, and there are still many favorable conditions present for 2025. However, recent experiences have shown that markets are capable of drastic swings, emphasizing the need for continued vigilance and readiness for the unexpected.

stocks, bullish, risks