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With a bullish outlook continuing towards a 7,000 target for the S&P 500 in 2025, Well Fargo (WFC, Financial) remains optimistic about equity markets with a projected double-digit return. However, the bank is expecting a near-term consolidation down to 5,828 by the end of 2024, pessimistic about sentiment tied to Fed policy uncertainty.
A rise in real yields has been aided by the Federal Reserve's recent 25-basis point rate cut, which Wells Fargo analysts said was a close call. The 10-year real rate soared to 2.18%, the same level seen during a tightening cycle in 2006. The bank says that bond investors may win from these higher real yields, but equities might suffer.
Despite headwinds, this forecast of solid market growth in 2025 is based on better GDP projections and a more relaxed regulatory environment. However, it is expected that there will be little to contain inflationary pressures, particularly tax-related ones, at least for the time being.
The bank's sector strategy favors a barbell approach, allocating 40 percent to Communication Services, 40 percent to Banks, and 20 percent to Staples. Wells Fargo says this mix is designed to balance the upside potential with downside protection, a strategy that has outperformed the broader S&P 500 during market volatility in recent months.
Positive fundamentals and economic growth are the key drivers of the bank's own optimism; 'The combination of economic growth and improved fundamentals supports our bullish view on equity markets in the coming year', they say.
This article first appeared on GuruFocus.