Why bullish investors have it all wrong heading into 2025, according to the biggest bear among Wall Street banks

• Wall Street strategists are bullish on the S&P 500, with several targets above 6,700 for 2025.
• But Stifel's Barry Bannister predicts negative returns for the index this year.
• Bannister warns sticky inflation, elevated interest rates, and poor GDP growth could hurt stocks.

Wall Street strategists are uber-bullish as 2025 kicks off. Several have year-end S&P 500 price targets above 6,700, and just two have targets below current levels around 5,900.

One of them is Stifel's Chief Equity Strategist Barry Bannister, with a target of 5,500.

What does Bannister think the rest of the market is getting wrong? A number of things.

Let's start with expectations around artificial intelligence. Valuations have been bid up to levels seen during prior bubbles, thanks in large part to how much investors see AI impacting future profits. The S&P 500's Shiller CAPE ratio, a comparison of stock prices to inflation-adjusted profits, has crossed into what Bannister deems "mania" territory for the fifth time in history. But it remains to be seen how the technology impacts the economy relative to expectations.

"Equity valuations are very stretched on a concept, AI, that we're putting all this money into it, but we don't have a real product," Bannister told BI on Friday. "We've never invested this much without knowing the endgame."

Then there are expectations around inflation and rate cuts, and long-end interest rates. A majority of the market expects one or two cuts this year, but they may end up with none if inflation remains elevated, Bannister said.

He thinks the core PCE measure of inflation will stay closer to the 3% level, forcing the central bank to keep rates where they are. That will, in turn, make bond market investors reassess yields on the 10-year Treasury note.

"If I removed one-and-half cuts, I'd be pushing that 10-year up closer to 5%, from 4.6% to 4.9%, let's say," he said. "And every time we've gotten to the high fours, the stock market starts having a wobble."

This ties into Bannister's worries about valuations. When valuations are elevated, future returns are muted. Yields on Treasurys, meanwhile, are risk-free, so the extra compensation for taking on equity-market risk dwindles, making stocks look less attractive.

In 2022, for instance, 10-year yields went from 1.5% to 4.9% from January to October amid a 25% decline in the S&P 500.

Third, Bannister is skeptical that the US economy can continue to grow at its current pace, with GDP growth above 2%. With wage growth coming down and inflation potentially remaining sticky, real wage growth could continue to shrink, hurting consumer spending, he said.

Stifel estimates GDP growth to fall to just over 1% by December 2025. When GDP growth has slowed, stocks have usually slowed down with it.

"We're in a doldrum, sort of like we had in 2011 or 2015, 2016," he said. "The Fed is deciding what to do, and you can see that mid-cycle slowdown. 2015 was very similar to what 2025 looks like to us."

Again, Bannister's outlook is out of consensus. If the market's exuberance around AI continues and the economy stays on its soft-landing path, he could be wrong. Stocks vastly outperformed virtually all expectations in 2024.

But with valuations as high as they are, there may be little room for error in the year ahead.