Wall Street Changes its View on the Stock Market

Lori Calvasina from RBC Capital recently increased her 2024 price target for the S&P 500 to 5,150 from 5,000. However, this change in predictions comes with a more cautious view compared to her team's stance in November 2023.

In her statement, Calvasina highlighted, "When we introduced our 5,000 target back in mid-November, it represented a gain of roughly 10% from levels in place at that time. Today, our 5,150 price target represents a gain of 8% vs. the index’s December 2023 close, making it fair to say our enthusiasm has actually come down a bit."

As of Monday, the S&P 500 closed at 4,764. The "higher but lower" outlook by the firm revolves around market sentiment and investor reactions to the Federal Reserve's tone and forecasts in December.

The central bank's projections of more aggressive interest rate cuts in 2024 triggered a rally across various asset classes, pushing the 10-year Treasury yield below 4%, and propelling the Dow Jones Industrial Average to a record high.

However, the stock market faced a stumbling start in 2024, marking its worst beginning to a year since 2016. Some Wall Street analysts attribute this to a "hangover" from a robust 2023, where the S&P 500 rose over 20%, and the Nasdaq surged more than 40%.

Referring to the American Association of Individual Investors' sentiment survey, RBC notes a recent rise in bullish sentiment, indicating a potentially flat market over the next three months and gains of approximately 6% over the next 12 months. In mid-November, this measure suggested a more optimistic outlook, with a projected rise of around 10% over the next year.

Despite the indicator's quick oscillations, this analysis sheds light on a crucial question faced by investors: Are markets anticipating, reacting to, or influencing the Fed's decisions?

In a simplified sense, lower interest rates tend to favor stocks. The prevailing belief is that the market's upward movement primarily anticipates lower interest rates in 2024. According to this line of thinking, the Fed's December outlook reinforced investors' confidence that their bet on lower rates was correct.

The classic market adage, "buy the rumor and sell the news," helps explain the modest pullback seen since December's highs. Once the Fed confirmed the rate cuts, the driving force behind this trade diminished.

Also Read: S&P 500 and Nasdaq React to Economic Data, Shaping Rate-Cut Expectations