Wall Street’s last remaining bears struggle to convince optimistic clients

A dwindling number of bearish Wall Street strategists are struggling to convince “fanatical” clients that slowing economic growth and excessive hype about artificial intelligence have left the US stock market vulnerable to a sharp downturn.

Banks including Goldman Sachs, Citigroup and UBS this month upgraded their end-of-year forecasts for the S&P 500 index, which has hit successive record highs during its surge of about 15 per cent so far this year, driven by a small group of soaring AI stocks. 

Faced with a growing number of investors convinced that the rally will continue, the few remaining bearish strategists say their contrarian views are proving an increasingly difficult sell.

“This rally has been tough and we’re having a hard time convincing [clients] to be bearish,” said Barry Bannister, chief equity strategist at Stifel. “There’s a wall of money that’s willing to buy the market at any price and embrace fanatical thinking.

“People are bubbled up right now, they think the sky is the limit,” added Bannister, who expects a mix of weaker growth and lingering inflation to drag the S&P down roughly 13 per cent from its current level by the end of the year.

BCA Research chief equity strategist Peter Berezin said his preferred leading economic indicators “are all pointing to a recession in the next nine months”, but many of his clients see things differently.

“The soft [economic] landing narrative is so incredibly entrenched that again and again I’m challenged in meetings by clients who say I’m too bearish,” Berezin said.

In a sign of how some previously-cautious analysts are throwing in the towel, investment bank Evercore ISI last week upgraded its end-of-year S&P forecast from 4,750 — which implied a small fall in the index for 2024 — to 6,000. That implies a further gain of almost 10 per cent over the next six months from the current index level of around 5,482 and makes it one of the most bullish banks.

High stock valuations are a key point of contention. Bears view the S&P 500’s roughly 25 times trailing price-to-earnings ratio — which is in the top decile of valuations since 1960 — as a red flag, arguing that stocks typically only trade at such expensive multiples ahead of sell-offs. But Evercore ISI’s chief equity strategist Julian Emanuel said selling based on high valuations alone “has been an unwise thing to do over the course of history.

“There have been three equally expensive regimes in the recent past — 1993 to 1995, 1998 to 2000 and 2020 to 2021 — and in each case the market rallied until we were in real proximity to the [economic] downturn,” Emanuel said.

Today, “the economy is definitely slowing, the labour market is certainly weakening, but we don’t see anything that screams recession here and now”.

Bears have a long history of finding it difficult to hold on to their contrarian views. While staying bearish could cost them their job during lengthy bull runs, capitulating and turning bullish can make them look foolish if the downturn they had been predicting materialises soon afterwards.

Tony Dye, nicknamed “Dr Doom” for his views on the overvaluation of equities during the late 1990s dotcom bubble, was ejected from Phillips & Drew Fund Management in early 2000, just weeks before the bubble burst. Long-standing hedge fund bear Russell Clark said in 2021 he would shut his fund after losses during the bull market.

Bannister and Berezin are not alone in thinking the US equity market may have run too far this time around. Neither are they the most pessimistic: JPMorgan analysts led by chief global markets strategist Marko Kolanovic believe the S&P 500 will tumble by almost 25 per cent from current levels by year-end.

A cooling labour market, declining home sales and rising consumer delinquencies are among several signals that suggest a recession may be on the horizon, according to Kolanovic, who counts the market’s dependence on chipmaker Nvidia and a few other AI groups as another potential weakness. “Rising markets on narrowing breadth has historically been an ominous sign,” he and his team wrote in a note to clients this week.

Earlier this month the bank laid out its glass half-empty take on the economic impact of generative AI. “For equities to avoid a 20 per cent-plus correction, you have to believe that tech will become a much more meaningful driver of growth for the broad economy in short order,” JPM wrote in a separate note. “We don’t think its impact on corporate [profit and loss statements] . . . will be that profound so suddenly.”

The bank recommended clients hold an overweight position in US stocks during the sell-off of 2022 before switching to recommending an underweight position in early 2023. It has stuck with that position ever since, even though the blue-chip index has surged by roughly 42 per cent since the start of that year.

“If you were bullish in 2022, bearish in 2023 and bearish again in 2024, why in the name of God should anyone listen to you?” said one equity strategist at a mid-tier US investment bank.

“The intellectual logic, I’m sure, is very sound,” the person added. “But perma-bears, just as much as perma-bulls, don’t get listened to when their calls don’t work out in the near or medium term.”