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The Bull Case vs. The Bear Case—Part Two

November 29, 2023

In response to the numerous 2024 S&P 500 price targets being released by various Wall Street firms, I wanted to cover the logic, facts and expectations that underly both bullish and bearish 2024 expectations. Yesterday, I laid out the bullish argument for stocks and explained the assumptions baked into S&P 500 price targets around 4,700-4,800 as well as what needs to happen for the S&P 500 to move through 5,000.

Today, I’ll review what bears need to believe if you think that the stock market is heading for a decline in 2024. The bearish argument for stocks can largely be summed up by this statement: Everything we were worried about for 2023 (when most analysts were bearish) actually happens in 2024. I say that, because a lot of the 2023 rally in stocks can be explained by a “not as bad as feared” situation, and not a series of materially positive surprises.


So, for stocks to roll over from here, all that has to happen is the worries of 2023 occur, because all remain possible.


  1. Economic growth doesn’t just slow, it contracts. There are no absolute certainties in the markets, but if there was a near certainty, it’s that high interest rates eventually kill economic expansions. The Fed has just finished the most dramatic rate hike cycle in decades and interest rates now sit at multi-decade highs. The duration of these higher rates will cause, first, a slowing of growth (likely happening now), and then later in 2024, an outright contraction. That contraction will validate classic recession signals we’ve had such as the inverted yield curve and dash the bulls’ hopes of a mild slowdown.

  2. Inflation stabilizes and does not decline further. The easy part of disinflation was CPI going from an absurdly unsustainable 9% to a more normal 3%-4%. But with companies and consumers now used to higher prices, the last bit of the inflation decline will be difficult to manufacture. So, while inflation isn’t going to bounce back, it’s not going to decline substantially, either, and it’ll stay solidly above the Fed’s 2% Core CPI target, which means…
  3. The Fed does not cut rates as expected, making “higher for longer” a reality. Inflation still solidly above target will prevent the Fed from materially cutting rates in 2024. Yes, a growth contraction will likely result in the Fed cutting rates. But stubbornly high inflation prevents any meaningful cuts and as a result, we have “higher for longer” rates, which only further pressures economic growth. The net result is stagflation.

  4. Corporate earnings growth disappoints. CE Provider is currently pricing in nearly 10% earnings growth from 2023 to 2024, but given the looming economic environment, that earnings growth is too optimistic. Earnings growth will disappoint as companies face a slowing economy and run out of room to cut costs, absent layoffs (which would deepen the economic contraction). What’s a realistic target for this bearish scenario? This macroeconomic environment doesn’t mean an epic market collapse, but it does mean that stocks are overvalued, investors are too optimistic, and the concerns of 2023 weren’t misguided, they were just early. From a market performance standpoint, because the environment above is what was expected at the start of 2023, we can look to where the S&P 500 started 2023 as a guide. The S&P 500 started 2023 just under 3,800, so I think that’s a reasonable downside target for the S&P 500. That would represent a 16% decline from current levels. And while that may seem like a long way down, it was about a month ago that the S&P 500 was flirting with breaking 4,000, and the only thing that’s changed since then is that market’s view the Fed will be more dovish than expected. If that expectation is reversed and we have a growth contraction, do not expect the S&P 500 to hold 4,000 in 2024.


Coming tomorrow: Which outcome I think is more likely.

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