Why the stunning rally in stocks this year could be followed by a 'hangover,' according to Wells Fargo
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- The euphoric rally in the stock market could be approaching a "hangover," according to Wells Fargo.
- The postelection rally in stocks looks disconnected from the economic data, the bank said in a note.
- That disconnect will need to be resolved, which could mean a correction in stocks, the firm added.
2024 was a terrific year for the stock market. The euphoric postelection rally, however, could lead to a near-term "hangover" in stocks, with the potential for as much as a 7% drop in the S&P 500, according to Wells Fargo.
In a note on Monday, the bank pointed to the disconnect growing between the equity market and the economy, with US indexes rallying higher after the presidential election despite lukewarm economic data.
The Bloomberg US Economic Surprise Index, which tracks economic data releases relative to the market's expectations, is hovering just above zero. That suggests the market has had few positive surprises about economic data in recent months, despite bullish sentiment fueling the market higher.
"This is concerning in our view, given the level of positive positioning that has taken place in equity markets since the elections. Put a different way, it suggests that investors are only focusing on the possibly brighter future while completely ignoring the current disappointing data," Sameer Samana, a senior global market strategist at the bank, said. "Eventually, we think this disconnect will need to be resolved."
Stocks are also flashing technical signals that suggest they're close to "overbought territory," Samana wrote, adding that investors should "beware the hangover."
The S&P 500 traded as high as 5,964 on Monday, above its 50-day moving average and its 200-day moving average.
Over the near term, the benchmark index could hit an upper ceiling at its most recent high of 6,090, Samana estimated. If the index were to trend downward, it could "find support" around its 200-day moving average of 5,515, he added, implying a 7% pullback from current levels was possible.
Wells Fargo still remains bullish on stocks overall in 2025. In a previous note, the bank predicted the S&P 500 could end the year around 6,500 to 6,700, pointing to a strong backdrop for the economy and corporate earnings growth.
Other forecasters on Wall Street, meanwhile, have called for a potential drawdown in stocks, given the S&P 500's dizzying climb so far this year.
BCA Research thinks stocks could fall into a bear market early next year, thanks to risks from historically high stock prices and potential weakness in the US economy.
Société Générale, the European bank that has warned of a US recession for the last several years, said it still saw a "profits crushing" downturn headed for the US, as evidenced by weakness in the labor market.