This year has been a bountiful one for the US stock market, with the S&P 500 index up over 27% so far this year. However, according to a report from Business Insider, Wells Fargo has warned that the euphoric post-election rally could lead the stock market into a "hangover period" in the short term, with the S&P 500 index potentially dropping as much as 7%.
Economic Data and Stock Market Disconnect
Wells Fargo released a report on Monday stating that the disconnect between the US stock market and the economy is widening, as the US stock market indices have continued to rise after the presidential election, despite the US economic data performing averagely.
The Bloomberg US Economic Surprise Index, which tracks the gap between actual economic performance and market expectations, is currently only slightly above zero, indicating that while optimism has driven the market higher, there has been little in the way of surprising economic data recently.
Sameer Samana, Senior Global Market Strategist at Wells Fargo, said:
This is concerning to us because the market's optimism has remained elevated since the election. In other words, investors seem to be focused solely on the potential bright future, while completely ignoring the currently disappointing economic data, and we believe this disconnect will ultimately need to be resolved.
Sameer Samana pointed out that from a technical standpoint, the stock market is approaching "overbought territory", and investors should "be wary of a hangover period". The S&P 500 index closed at 6,037 on Thursday, and the index could reach a near-term high of around 6,090 points, but if the index starts to decline, it may find support around the 200-day moving average of around 5,515 points, implying a potential 7% pullback from current levels.
However, despite the potential for short-term volatility, Wells Fargo remains optimistic about the stock market's outlook for 2025, with a previous report predicting the S&P 500 index could reach 6,500 to 6,700 points by the end of 2025, supported by strong economic and corporate earnings growth.
Other Institutions Warn of Risks
Wells Fargo is not the only institution warning of risks. BCA Research believes that due to the stock market's historical highs and the potential weakness in the US economy, the stock market could enter a bear market early next year. Societe Generale also stated that based on the signs of weakness in the labor market, the US economy still faces downside risks of "profit compression".
Investors should be aware that if the US stock market experiences a correction, the cryptocurrency market may also face downside risks, as cryptocurrencies are considered a risk asset and often have a certain correlation with the stock market. Increased economic uncertainty could further weaken the market's risk appetite.
