Predicting "Can't Catch Up" with the Market, Wall Street Strategists Face the Biggest "Chasing Gains Dilemma" of 2024

Top stock strategists on Wall Street are finding that their market predictions are being left far behind by an unexpectedly strong rally, forcing them into a difficult "chasing the rally" competition, continuously raising what once seemed like conservative targets.

This record-breaking stock market surge has pushed the S&P 500 index to a level nearly 3% higher than the average year-end forecast of strategists. Data shows that the current average forecast among strategists is 6,486 points. Only in 2024 and 1999 did bullish options lag far behind the actual market returns.

Driving this rally is a series of unexpectedly positive factors, including strong corporate earnings growth, sustained enthusiasm in the market for breakthroughs in artificial intelligence by large tech companies, and the recent prospect of further interest rate cuts by the Federal Reserve. The influence of these factors has overshadowed concerns about Trump’s trade policies and signs of a cooling U.S. economy.

The direct result is that strategists from institutions like Goldman Sachs and Deutsche Bank have been scrambling to catch up with the market. Since the stock market's remarkable rebound earlier this year from a decline triggered by Trump’s tariff policies, many strategists have repeatedly raised their market outlooks.

Earnings and AI Boom Overwhelm Macro Concerns

For forecasters on Wall Street, this is a perplexing time. Previously, their concerns about Trump’s trade policies and signs of economic slowdown have now been drowned out by the market's strong performance.

The core driver among these is strong corporate earnings. According to data, analysts currently expect the profits of S&P 500 constituent companies to grow by 9.4% this year, up from the 7.1% forecast shortly after Labor Day. Ed Yardeni, a senior market strategist at Yardeni Research, stated:

“Analysts tend to be conservative before earnings season, but this time they are particularly conservative, and I believe strategists are as well. I have always been optimistic about the resilience of the economy, but even so, I am surprised that earnings and profit margins have hardly budged in the face of Trump’s tariffs.”

At the same time, the market's enthusiasm for breakthroughs in artificial intelligence by large tech companies provides investors with another optimistic reason.

Forecast Targets Forced to be Raised Repeatedly

Faced with the ongoing market rally, strategists find themselves having to frequently revise their forecasts. Earlier this month, Ed Yardeni raised his personal year-end forecast for the S&P 500 index from 6,600 points to 6,800 points, admitting that he has revised his forecasts more times this year than ever before. He also noted that by the end of 2025, there is a 25% chance that the index could experience a "melt-up" to 7,000 points, and believes that this possibility would increase if the Federal Reserve continues to cut interest rates.

Julian Emanuel, Chief Equity and Quantitative Strategist at Evercore ISI, also expressed similar surprise, stating, “What surprises us is the relentless nature of this rally, with almost no substantive pullbacks.” After raising his year-end forecast to 6,250 points, he recently stated that he expects the benchmark index to climb to 7,750 points by the end of 2026 On Monday, the S&P 500 index closed slightly below 6,700 points.

Of course, the hesitation of strategists was not without reason. The S&P 500 index has soared 34% from its low in April, and its valuation multiple has reached the highest level since January 2021. Additionally, how tariff policies will ultimately affect growth and inflation prospects remains far from clear.

New Momentum for Fed Rate Cuts

Adding fuel to this wave of optimism is the Federal Reserve's latest policy direction. The Fed decided to begin cutting rates again last week after a nine-month pause, which has led the market to believe that the current upward momentum still has support.

According to data from Barclays, the Federal Reserve has cut rates 16 times in the past half-century when the S&P 500 index was within 1% of its record high—just as was the case last week. Each time, the stock market recorded gains a year later.

Max Kettner, Chief Multi-Asset Strategist at HSBC Holdings, believes that the U.S. stock market is experiencing a "win-win" moment as the U.S. economy continues to grow and the Fed shows a willingness to address the economic slowdown that has begun to impact low-income households and small businesses. He stated:

"This policy combination is very rare and continues to support a positive risk appetite stance."