(Yahoo! Finance) - Over the past few years, a stronger-than-expected US economy has continuously surprised Wall Street and its projections.
While we've become somewhat used to them now, the recent underestimations are a reversal of what was seen prior to the pandemic when US economic forecasts were often too lofty, RBC Capital Markets head of US equity strategy Lori Calvasina told Yahoo Finance.
And now, heading into 2025, strategists like Calvasina are leaning into the post-pandemic trend and betting consensus economic forecasts will once again be surprised to the upside by the US economy.
"Given that history recently of underestimating [US economic growth] and the fact that GDP forecasts for next year are creeping up very, very, very slowly, I'm making a bet on the 2% to 3% [growth] instead of the 1% to 2%," said Calvasina, who sees the S&P 500 ending next year at 6,600.
On Tuesday, Wells Fargo's Christopher Harvey issued the most bullish target on Wall Street at 7,007 while highlighting a "cyclical opportunity catalyzed by upward GDP revisions."
If 2024's market driving abbreviation was AI, 2025's is set to be GDP.
Bank of America's equity and quantitative strategy team offered a similar pitch in its 2025 outlook note, which forecast the S&P 500 ending the year at 6,666. The firm's economics team projects the US economy will grow at an annualized rate of 2.4% in 2025, higher than Bloomberg consensus forecasts for 2.1% growth.
This has BofA favoring "GDP sensitive companies," with the firm recommending overweights on the Financials (XLF), Consumer Discretionary (XLY), Materials (XLB), Real Estate (XLRE), and Utilities (XLU) sectors.
"We see more opportunities in stocks than the index," Bofa's Savita Subramanian wrote. "In particular, we like companies with healthy cash return prospects and a tether to the US economy: large cap Value stocks."
Calvasina agrees.
"For Value to outperform, in recent years we’ve needed to see GDP run a bit hotter," Calvasina said. "We’ve given an edge to the broadening of market leadership or the shift into Value, but think it’s a close call."
Deutsche Bank's Bankhim Chadha, who is among Wall Street's most bullish strategists, projecting the S&P 500 to end 2025 at 7,000, also believes a "historically strong economic backdrop" will be a key driver.
"While the consensus looked for recession [in recent years] the economic backdrop turned out to be very robust, with the present combination of low unemployment and strong GDP growth seen only 6% of the time historically," Chadha wrote. "Prior such episodes, during the 1960s and [the second half of the] 1990s also saw strong equity performance."
A close look at Calvasina's work shows why economic growth meeting, or exceeding, positive expectations could be crucial to the stock market rally. Dating back to 1947, GDP has grown between 1.1% and 2% five times. Stocks were higher just 40% in those years with an average decline of 3.4%. Meanwhile, in years when GDP tracked between 2.1% and 3%, stocks were higher 70% of the time with an average return of nearly 11%.
So while some Wall Street strategists are often quick to tell you the stock market is not the economy, it seems like, at least for 2025, history is showing us that when the economy starts to decline toward 0%, it's not usually a positive sign for stocks. Perhaps a reason why the economy falling short of the more than 2.1% growth expectations and potentially flashing signs of a slowdown isn't a part of the bullish calls headed into next year.
By Josh Schafer - Reporter
