Stock Bears Are Going Extinct. Time To Worry?

As the year progresses, Wall Street analysts are once again attempting to predict how US stocks will perform in the coming months. Last year at this time, few experts anticipated that stocks would rise as dramatically as they did, with a notable increase of 23% in 2024. Most analysts believed the market would remain stagnant, while some more pessimistic voices forecasted a significant downturn. This pattern of underestimating market performance has become a recurring theme.

However, the sentiment on Wall Street appears to have shifted this year. The average strategist now predicts that the S&P 500 Index will reach 6,600 by the end of 2025, suggesting a potential growth of approximately 12%. Many analysts who were once skeptical are now increasingly optimistic, and only two strategists are currently predicting the index will drop below 6,000. This evolution in outlook may reflect the remarkable performance of the S&P 500 over the past two years, but it also raises concerns about potential risks in the upcoming year.

A behavioral tendency known as recency bias may be playing a role in this optimistic outlook, as it often leads individuals to place undue weight on recent experiences when predicting the future. Nonetheless, there is a rational basis for the positive sentiment among investors, which should not be entirely dismissed as mere psychology.

The excitement surrounding generative artificial intelligence (AI) that began in 2022 has proven to be more than just a fleeting trend. It has spurred substantial investments, particularly in tech giants like Nvidia, which has experienced unprecedented revenue growth. More generally, the success of key growth companies, often referred to as the "Magnificent 7" (including Apple, Microsoft, Nvidia, Amazon, Meta, Tesla), has changed how Wall Street analysts approach their forecasts. These companies now represent 33% of the S&P 500 by weight, and any projections must account for their future prospects, which seem more promising than ever.

The U.S. economy has emerged as a dominant player among developed markets, achieving productivity-driven growth not witnessed since the early 2000s. This growth has maintained favorable consumer and labor market dynamics, countering many doomsday predictions. At the same time, inflation has been declining.

That said, the current climate does introduce significant new risks. One key concern arises when the majority of investors embrace a bullish narrative—who else is left to drive up stock prices? While it is unlikely that we have reached total investor saturation, we may be approaching it. Furthermore, many portfolios are now heavily weighted towards the same "Magnificent 7" stocks, whose valuations have risen so much that they may be discounting their future growth potential. Analysts are beginning to revise their growth expectations from extraordinary to merely strong. Thus, any slight catalyst, such as a spike in inflation or a renewed U.S.-China trade conflict, could trigger a market selloff.

Peter Berezin, chief strategist at BCA Research and currently one of the most bearish analysts, anticipates a U.S. recession in the near future. He highlights the risk of a possible trade war instigated by political tensions, which could suppress business investment, alongside a looming threat of rising delinquency rates on credit cards and auto loans. Berezin has expressed a strong bearish perspective, noting, "This is really the first time in my career that I’ve been really outspoken bearish. The market needs to hear a more sober bearish voice, because they’re so rare these days."

As previously noted, it is crucial to regard the stock projections as educated guesses rather than certainties. While analysts have learned that stock markets generally trend upwards, the average forecast in financial data tends to remain positive. However, a closer look reveals that these average estimates often prove to be unreliable. In prior market downturns, analysts maintained bullish expectations even during the dot-com bubble and the 2008 financial crisis. Similarly, they did not accurately predict the market recovery seen in 2023 and 2024.

Given these dynamics, it may be wise for investors to remain engaged in the market while also hedging their portfolios through a mix of bonds, options, and more stable stocks. While there is still plenty of potential in the stock market for the latter part of 2025, the recent years have shown that market shifts can occur unpredictably, suggesting that caution should also be exercised moving forward.

stocks, bears, predictions