• Stocks News
• January 8, 2025

Wall Street Frenzy Cools: Outlook for U.S. Stocks

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As the U.Sstock market embarks on a promising surge, several institutions have recently revised their target forecasts for the index for next yearThe median prediction from Wall Street for the S&P 500's year-end endpoint now stands at a formidable 6600 points, revealing an implicit upside potential of over 12%. However, the Federal Reserve's latest rate decision delivered a stark wake-up call to investorsThe dampened expectations for interest rate cuts led to significant declines on Wednesday, with all three major U.Sindices dropping by more than 2.5%. Consequently, the market is now reassessing its outlook on interest rate trajectories, as the uncertainties surrounding monetary policy and the macroeconomic landscape could inject further turbulence into the U.Sequity market, which has enjoyed relatively smooth sailing in recent years.

The cautious stance adopted by monetary policy is becoming increasingly apparent

Rick Rieder, the Global Chief Investment Officer for Fixed Income at BlackRock, noted that the impending policies of the new administration at the White House could have far-reaching and unpredictable consequencesSuch unpredictability necessitates a more guarded approach by investors as they strategize for the new fiscal landscape.

Futures linked to the federal funds rate indicate that the Federal Reserve is likely to halt cuts in January of next year, with anticipated reductions totaling a mere 40 basis points throughout the year, which falls short of the expectations from the Federal Open Market Committee (FOMC). Rieder's advice for investors is to remain vigilant regarding interest rate shifts, as the long-term rates in the bond market could heighten due to any potential "short-term inflationary impacts." This underscores the complicated interplay between inflation projections and interest rate adjustments in shaping investment strategies.

The implications of changing perceptions regarding monetary policy have triggered a notable rise in U.S

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Treasury yieldsThe benchmark 10-year Treasury yield climbed to above 4.50% at one point during the trading session, marking the highest level since May of this yearJeffrey Gundlach, the CEO of DoubleLine Capital and widely regarded as the “new bond king,” stated that an aggressive cycle of interest rate cuts from the Fed is no longer on the horizonHis sentiment resonates with many analysts who suggest that the groundwork for cautious rate adjustments is being laid out by the Federal Reserve.

Further emphasizing this cautious approach, Rieder indicated that in light of potential shifts in trade dynamics and government expenditure, the upcoming policies from the next administration will add new variables into the Fed's reliance on data for its monetary decision-makingHe believes that this data dependency will reach "a whole new level," reflecting the intricate connection between governmental policies and economic metrics.

On the other hand, Rieder also foresaw that the “risk-free rate” in the bond market is likely to become more volatile compared to corporate credit rates

This volatility stems from traders grappling with future rate direction from the Fed while also keeping an eye on inflation trends and the necessity for the U.Sgovernment to issue bonds to cover its budget deficits.

As volatility risks potentially loom once again, the strong economic growth characterized by rising stock prices over the past two years becomes a crucial underpinningThe Atlanta Fed's GDPNow model projects a GDP growth rate of 3.2% for the fourth quarter of this year, constructing a fundamentally robust backdrop against which market expectations are set.

Goldman Sachs' Chief U.SEconomist David Mericle predicts that the Federal Reserve will cut rates in March, June, and September of next year, though he expects the terminal rate for this rate-cutting cycle to remain slightly elevated, falling between 3.50% and 3.75%. "Fed officials appear more open to re-evaluating the neutral rate than we anticipated," he expressed, suggesting that embracing a more cautious stance sooner may be necessary for the Federal Reserve as they navigate the complexities of the economic environment.

David Kelly, the Chief Global Strategist at J.P

Morgan Asset Management, remarked that recent data has shown an economy that is more resilient, stubborn inflation, and pronounced bubbles in the stock marketCoupled with the new government's potential policies to exacerbate inflationary pressures, he urged investors to ask themselves whether they are prepared for potential interest rate hikes and the turbulence that may arise from conflicting monetary and fiscal policies during these times.

A recent report by Deutsche Bank foretold the most significant downside risks and volatility for markets next year would stem from global trade disputes, downturns in the U.Stechnology sector, and growing concerns regarding inflation and bond yieldsThis highlights how interwoven the global economic fabrics are and how susceptible they can be to shifts in governance and market sentiment.

Regarding the overwhelmingly optimistic outlook among Wall Street analysts, Larry Adam, Chief Investment Officer at Raymond James, cautioned that while a median target of 5000 for 2024 may seem feasible, most economists foresee a looming economic recession that poses downside risks to earnings growth

The irony is stark in that investor optimism could lead to disappointment if it is not tempered by realistic considerations of economic health.

Adam urged a healthy skepticism toward bullish forecasts, asserting that the market's "overly" optimistic sentiment might escalate into "moderate disappointment," which could precipitate volatilityHe elaborated, "All the various factors that could propel the market toward incredible sustainability by 2025 have already been priced in; this includes zero bad news emerging from Washington, no bad economic data, and no negative corporate earnings surprises.”

Investors are thus encouraged to conduct risk assessments and re-evaluate their asset allocations in light of these projectionsMelissa Brown, the Director of Research at SimCorp, emphasized that Wall Street's "consensus estimates" for the market in 2025 are unlikely to serve as the final word for next year's performance