Wall Street’s stock market upgrades are now downgrades

RBC Capital’s Lori Calvasina became the latest strategist to raise her 2024 price target for the S&P 500 on Monday, lifting her forecast to 5,150 from 5,000. But by raising expectations for the benchmark index this year, Calvasina actually offered a more tempered outlook for stocks than what her team set forth in November 2023. “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,” Calvasina wrote. “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.” The S&P 500 closed at 4,764 on Monday. The firm’s “higher but lower” outlook centers on market sentiment and the enthusiasm with which investors reacted to the Federal Reserve’s tone and forecasts in December. Forecasts from the central bank that interest rates would fall more aggressively this year kicked off a rally across asset classes, sending the 10-year Treasury yield below 4% and the Dow Jones Industrial Average to a record high. Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards And then stocks stumbled out of the gate in 2024, recording their worst start to a year since 2016. One Wall Street strategist went so far as to attribute the market’s early struggles as a “hangover” from a 2023 that saw the S&P 500 rise more than 20% and the Nasdaq gain more than 40%. Citing the American Association of Individual Investors’ closely tracked sentiment survey, RBC notes the recent uptick in bullish sentiment points to a flat market over the next three months and gains closer to 6% over the next 12. As recently as mid-November, this measure suggested the S&P 500 would rise closer to 10% over the next year. And while the firm notes this indicator has been “oscillating quickly,” this call helps us home in on the key question that has faced investors in the last few months. Namely: Are markets trying to anticipate, react to, or impose some kind of outcome on the Fed? All else equal, lower interest rates are good for stocks. This logic says the market’s move higher has been largely in anticipation of lower interest rates in 2024. December’s outlook from the Fed, this thinking goes, merely solidified investor belief that this bet had been the right one all along. The old cliché that says markets buy the rumor and sell the news can also help us explain the modest pullback we’ve seen since December’s highs — once the Fed told us they were lowering rates, the impetus for this trade went away.