U.S. market and economic columnist Jonathan Levin stated that since the pandemic, Wall Street strategists have repeatedly underestimated the performance of the U.S. stock market in their annual forecasts at the beginning of the year, prompting them to crazily raise their annual target forecasts for U.S. stocks close to the end of the year. A series of upward revisions may look somewhat like a 'short squeeze', a situation where traders are forced to quickly cover put bets, typically strengthening the upward momentum of securities. In this sense, strategists have already experienced the largest short squeeze in 10 years this year, and seasonal trends indicate that this situation may continue in the coming months.

Levin pointed out that overall, the forecasts of market analysts have been inconsistent, but it has been proven that the current US stock market is particularly difficult for strategists to grasp.

First, the outstanding performance of large growth stocks companies has overturned the traditional model that explains the relationship between the macroeconomic situation, interest rates, and the fair value of the S&P 500 index. Since the beginning of 2020,$NVIDIA (NVDA.US)$and$Apple (AAPL.US)$N/A.$Microsoft (MSFT.US)$and$Alphabet-A (GOOGL.US)$And$Amazon (AMZN.US)$These five companies almost account for half of the benchmark index's performance. This means that if the macro model cannot explain the special situations of these companies, including the ai theme, then it is not sufficient. Although some stocks benefit from continuously rising price-earnings ratios, the main driver of their increase is the substantial growth in revenue and profit.

Second, economists and strategists have consistently misjudged the strength of the US economy. In early 2023, the median forecast of economists showed that they believed the US economy would barely survive 2023. However, the reality is the opposite, as the US economy grew by 2.5% and it appears that it is expected to reach this level again this year. Most of the forecast errors may be due to an excessive reliance on old rules of thumb, including the view that Fed rate hikes usually lead to economic recessions. This may be correct in a 'normal' economic cycle, but after the epidemic, the reality of the US economy is that employers are hoarding labor, consumers are returning to restaurants and concerts regardless of everything, and home equity is high. Economists may also have underestimated the capital expenditure brought about by the AI arms race and the impact of President Biden's industrial policies on the macroeconomy.

However, the average forecast of strategists shows that the S&P 500 index is expected to decline by about 3% this year, closing at 5469 points (with a median of 5600 points and a forecast range of 4200 to 6000 points) - Levin finds this prediction puzzling because many parts of the economic narrative for 2023-2024 remain intact and are supported by real-time data. The GDPNow model from the Atlanta Fed shows that the current annualized growth rate of the US economy is 2.5%. Among the constituent companies of the S&P 500 index, about 81% of the companies have outperformed Wall Street's expectations in the current earnings season, including leaders in the consumer industry. $Target (TGT.US)$And$Walmart (WMT.US)$Before the Federal Reserve may begin cutting interest rates in September, long-term borrowing costs have already started to decline significantly. Initial jobless claims indicate that layoffs are not out of control, and the recent sharp drop in stock prices of ai chip manufacturer Nvidia is more due to specific production obstacles rather than the long-term prospects of ai.

Meanwhile, besides the other stocks of tech giants, it seems that other stocks are catching up. Excluding the top five constituents, it is predicted that the profit growth of companies in the S&P 500 index constituents will accelerate by 2025.

Levin wrote that the current forward price-to-earnings ratio of the S&P 500 index is 21.3 times, at a historical high. However, with support from fundamentals and exciting stories, high valuations can be maintained for a long time. Considering that there seems to be another round of short squeezes by strategists this autumn and winter, it is hard to imagine an imminent liquidation.

Editor/new