Wall Street’s Big Mistake: How the Pundits Got It So Wrong in 2024

2024 is shaping up to be one of the best years for the stock market in modern history.

Until October 22 S&P 500 (INDEX: ^SPX) broad market index rose 21.5%, and during the first nine months of the year the index reached best performance since 1997, when investors were in the midst of the dot-com boom.

However, it was not to be. In 2024 Wall Street still largely predicted a recession due to the inverted yield curve and hedged its risk for 2024.

There was also some skepticism about the Fed’s ability to make a soft landing. While market watchers generally expected the federal funds rate to decline, most appeared to believe interest rates would be cut to deal with the economic downturn rather than due to a significant reduction in inflation.

In fact, at the end of January, the average Wall Street forecast was for the S&P 500 to end the year at just 4,861, which represented effectively flat gains for the index at the time, or just 2% for the year, below the S&P 500’s historical average of 7% annual profit, excluding dividends.

Among the more bearish forecasts at that time was an exit from JPMorgan Chasewhich had a price target of only 4200. He argued that valuations were high and he expected the stock to fall due to a challenging macro environment with weak growth.

Obviously, the market got this prediction wrong. In fact, every major research firm was well below the current S&P 500 at around 5,800. Yardeni Research set a street target of 5,400 at the start of the year.

In the last two months, everything can change. The election results could shake the markets. We’re heading into peak earnings season and there’s a lot of geopolitical uncertainty in the world, but without a black swan event like a pandemic, the dip below 5,000 that Wall Street was expecting is highly unlikely.

Let’s take a look at a few takeaways from Wall Street’s dismal forecast for 2024.

Wall Street underestimated the power of AI

Nvidia (NVDA 0.80%) has fueled the stock market since the start of 2023, but Wall Street appears to have ignored this potential in 2024, as Nvidia’s performance was actually quite subdued in the second half of 2023. However, the AI ​​chipmaker continued to deliver incredible results. Results this year, and the stock has nearly tripled, adding roughly $2 trillion in market value and generating a large portion of the S&P 500’s gains.

The hype surrounding artificial intelligence and the growth in the sector has sent other stocks soaring Purpose of the platform and Broadcomwhich are up more than 50% year-to-date, prompting investors to pile into the new sector, boosting utility shares on a surge in demand for the power needed to run AI data centers.

The utilities sector is the best performing sector of the stock market this year with a gain of 29%. VistraThe deregulated energy company, whose earnings could surge due to increased demand for electricity, led the S&P 500, rising 224%. Those gains mostly came from changes in future expectations rather than current earnings, showing that the S&P 500 is as dependent on sentiment and future expectations as it is on the fundamentals.

Nobody knows anything

This may not surprise you, but this isn’t the first time Wall Street’s forecast for the start of the year has been absurdly inaccurate.

In fact, just last year, Wall Street missed a beat. Experts had called for the S&P 500 to rise just 6% after the 2022 bear market, but instead the index jumped 24%.

The New York Times found that since at least 2000, following Wall Street advice was as effective as shooting darts. From 2000 to 2023, the median Wall Street forecast missed the year-end result by 13.8 percentage points annually, effectively rendering them worthless.

Today’s market seems especially difficult to predict because Wall Street has never seen anything like it before. The economy is still recovering from the once-in-a-century pandemic and is overcoming the worst inflation in 40 years, which was caused by the stimulus during the pandemic. Investors are also reacting to emerging artificial intelligence technologies that could be as revolutionary as the Internet, or as disruptive.

What investors should do is stick to the basics

No one, not even Warren Buffett, can predict what stocks will do in the short term, and Buffett has said that trying to time the market is foolish.

Instead, there are two better investment options, both of which have Buffett’s approval.

First, investors can buy an index fund, like one that tracks the S&P 500, and stick with it for the long term. The S&P 500 has historically returned an average of 9% with dividends reinvested.

Another winning approach is to find stocks with sustainable competitive advantages, like Nvidia, and hold them for the long term. This is a riskier strategy than buying an index fund, but it has much more upside potential.

However you choose to invest, you’re better off ignoring Wall Street forecasts and price targets, which change with the direction of the wind and are almost always just noise. Take Buffett’s advice and find stocks with wide moats, or just leave your money in an index fund for the long haul.