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According to Stifel, the S&P 500 could lose a quarter of its value next year.
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The benchmark index appears to have entered a “mania,” the company’s strategists said in a note.
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Investors could suffer long-term consequences as manias typically lead to poor returns over the next decade.
It appears the S&P 500 is in the midst of a new “mania,” and investors could see a sharp decline in the benchmark index sometime next year, according to Stifel.
Strategists at the investment firm pointed to high valuations, with the S&P 500 breaking a string of record highs this year on an improving economic outlook, expectations for Fed rate cuts and hype around artificial intelligence.
But the benchmark index now resembles the past four manias that have occurred, the company said, comparing the current investment climate to the pandemic stock boom, dot-com bubble and stock market booms of the 1920s and late 1800s.
Growth returns as “excess value” look “almost exactly the same” in today’s market as they did in the run-up to the 1929 stock market crash, the company added.
“We took a blank look at the stock market and came out with the same ‘smh’ emoji reaction (shaking our heads). Despite all the soft optimism and Fed rate cut optimism, the S&P 500 is up almost 40% on an annual basis. overstated,” strategists said in a note on Tuesday.
If the S&P 500 follows the path of a “classic mania,” that means the benchmark index will rise to around 6,400 before falling back to 4,750 next year, strategists said.
“Sure, we could pick the best of them and apply the most overvalued cyclically adjusted valuation level of the last 35 years to show about 10% more upside, but that same analysis of a century of manias also gives the S&P numbers up. 500 in 2025 to where 2024 started (a 26% decline from that projected peak),” the note said.
Stock markets could be in trouble next year due to the uncertain prospects for Fed rate cuts, strategists suggested. While the Fed has signaled that more cuts are coming, central bankers also risk undermining their inflation targets if they cut rates too quickly.
“The conclusion…is that if the Fed cuts rates in 2025 if there is no recession (two 25’s as this year ends don’t count), that would be a mistake, with investors paying the price in 2025/2026, based on historical precedent,” strategists wrote.
Investors could suffer long-term consequences, she added, pointing to previous manias, which historically led to weak stock returns over the ensuing decade.
“Or at least that has been the case for the past three generations, making the manias on the way down as disruptive to capital markets as they were euphoric on the way up,” they said.
A handful of other Wall Street forecasters have also said stocks appear overvalued, but investors generally remain optimistic about the outlook for stocks, especially as they expect more rate cuts through 2025.
Read the original article on Business Insider
