Broker Check

The Bull Case vs. The Bear Case

November 28, 2023

Numerous Wall Street firms are unveiling their 2024 S&P 500 targets and as I was reviewing many of them over the past several days, I thought it’d be helpful to lay out the bull case underlying positive forecasts, the bear case underlying negative forecasts and which one I think is more likely.

 While outlining the bull and bear cases is a consistently helpful exercise, this also has a very practical application, as, “Are you bullish or bearish” is a question I’m asked constantly by clients.

 

What The Bull’s Think Will Happen

The bullish argument for stocks can largely be summed up by this statement: Everything that’s already priced in actually happens. I say that because most of the year end 2024 S&P 500 price targets are in the 4,700-4,800 range, which reflects some modest upside from current levels. More specifically, if you are bullish, here’s what you need to believe:

  1. No economic slowdown. Yes, growth should moderate (and probably will). But strong consumer spending and robust employment provide major support for the economy next year. So while growth may slow, it won’t meaningfully contract and as such, the economy won’t become a headwind on risk assets.
  2. Inflation continues to decline. Essentially, the entire 2021- 2022 spike in inflation was caused by supply chain issues that are rapidly being fixed. And even if “Greed-flation” has kept prices higher than they otherwise would have been, the mild slowing in growth will lead to companies cutting prices to keep market share and inflation will continue to gradually drift lower.
  3. No hawkish surprises from the Fed. Importantly, we don’t need rate cuts for the S&P 500 to rally in 2024. Instead, we just need the Fed to not give any hawkish surprises and let expected growth (slowing but stable) and declining inflation put consistent downward pressure on Treasury yields.

 

That decline in yields will 1) Support economic growth and 2) Keep a market multiple elevated, paving the way to higher stock prices in 2024. 3) No reduction in earnings. If 2023 has taught us anything, it’s that U.S. corporations are adept at maintaining the bottom line through cost cutting, as despite some evidence of slowing growth, corporate earnings have remained robust. That will continue in 2024 as A) Growth won’t be so bad as to become a structural headwind on earnings and B) Corporations still have ample room to increase productivity and reduce costs. As such, 2024 expected earnings will remain around $245/share.

The net takeaway is this: The 2024 macroeconomic environment will allow the S&P 500 to trade around 19X 2024 earnings ($245/share), which equates to somewhere between 4,655 (19*$245) and 4,778 (19.5*245) and this logic and math is how most Wall Street strategists are coming up with their 4,700 price target.

 

Tomorrow, I will send you my view on the Bear case. 


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