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The S&P 500 could lose a quarter of its value next year, according to Stifel.
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The benchmark index appears caught in a “mania,” the company’s strategists said in a note.
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Investors could be hurt in the long term, as manias tend to lead to poor returns over the next decade.
The S&P 500 appears to be in the midst of another “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 lofty valuations, and the S&P 500 surpassed a series of all-time highs this year thanks to an improving economic outlook, expectations of Fed rate cuts and enthusiasm for artificial intelligence.
But the benchmark now looks like the last four manias that have taken place, the firm said, comparing the current investment environment to the pandemic stock boom, the dot-com bubble and the stock rallies of the 1920s and late 19th century.
Returns on “excess value” growth in today’s market appear “almost exactly the same” as before the 1929 stock crash, the company added.
“We took a look at the stock market from scratch and came away with the same smh (shaking head) emoji reaction. Despite all the optimism about Fed dovishment and rate cuts, the S&P 500 is up nearly 40 % YoY simply surpassed,” the strategists said in a note on Tuesday.
If the S&P 500 follows the path of a “classic mania,” that implies the benchmark index will rise to around 6,400 before falling back to 4,750 next year, strategists said.
“Sure, we can pick among the best 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 returns the S&P 500 in 2025 to where 2024 began (26% less than that potential peak)”, the note adds.
Stocks could be challenged next year due to the uncertain outlook for Fed rate cuts, strategists suggested. While the Federal Reserve has signaled that more cuts are coming, central bankers also risk undermining their inflation goals if they cut rates too soon.
“The bottom line… is that if the Fed cuts rates in 2025 without a recession (two 25s as this year comes to a close don’t count), then that would be a mistake, and investors would pay the price in 2025/2026. , according to historical precedent,” the strategists wrote.
Investors could be hurt in the long term, they added, pointing to previous manias, which historically led to weak stock returns over the following decade.
“Or at least that’s how it has been for the last three generations, making manias as disruptive to capital markets on their way down as they are euphoric on their way up,” they said.
A handful of other Wall Street forecasters have also said stocks appear overvalued, but investors remain generally optimistic about the outlook for stocks, particularly as they expect more rate cuts in 2025.
Read the original article on Business Insider