S&P 500 rally: optimism amid uncertainty

[Ben Graham]

Christmas is a time for predictions. No one has a crystal ball, and Wall Street analysts are attempting the impossible: forecasting the future of the S&P 500 amid geopolitical conflicts, Donald Trump's ambitions to reshape the world, and his influence on the Federal Reserve, all while the broad stock index remains dependent on a small group of large companies. However, as the saying goes, the attempt is not a punishment. According to Piper Sandler, forecasts typically lag actual values by about two months. While specific figures may vary, direction matters.

Dynamics of Forecast Lags Relative to Actual S&P 500 Performance

The consensus estimate among Wall Street experts suggests an 11% increase in the S&P 500 for 2026. At the end of 2024, the broad market index was expected to rise by 9% in 2025, but it actually doubled that, exceeding even the most bullish forecast by 3 percentage points. The bullish projection for the next year stands at 8,000, set by Oppenheimer and Deutsche Bank, based on the assumption of a strong US economy that will drive corporate profits and, along with continued monetary expansion by the Fed, foster a sustained rally in the US stock market.

However, these drivers have largely already been priced into the S&P 500, along with the narrative surrounding artificial intelligence technology. These talking points are being pushed by most Wall Street analysts. When everyone is in the same boat, you don't need a recession to capsize it. Any disappointments regarding corporate earnings or macroeconomic data could trigger a spike in volatility and initiate a correction in the broad market index. Indeed, the gap between the most bullish and most bearish forecasts is just 16 percentage points, marking the smallest difference since 2017.

Dynamics of Bullish and Bearish Forecast Spreads for the S&P 500

Stifel and Bank of America expect the S&P 500 to rise to between 7,000 and 7,100. In more pessimistic scenarios, it could plunge to as low as 5,280. The US economy relies on the wealth effect and capital expenditures in AI technology. A reality check on artificial intelligence could lead to significant sell-offs in the broad market index, overturning the wealth effect and potentially culminating in a recession.

On Christmas, no one wants to be pessimistic. The consensus forecast from Bloomberg experts suggests a 2% expansion of the US economy in 2026. This does not indicate a downturn, so the level of anxiety regarding the US stock market could be reduced. Nevertheless, investors should remain vigilant. In this world, anything is possible.

From a technical standpoint, the daily chart of the S&P 500 shows a rise in prices for four consecutive trading sessions, with a recovery in the trend and a breakthrough to record peaks. The market is confidently moving toward the pivot levels of 7,000 and 7,100. As long as the broad market index trades above the key support level of fair value at 6,830, a focus on buying should be maintained.

The material has been provided by InstaForex Company - www.instaforex.com