Low VIX Belies Wall Street Stock Confusion

Earlier this week, I talked of a new “strategist short squeeze” on Wall Street.

The idea is simple: The recent melt-up in US equities was effectively endorsed by the Fed last week, which means anyone predicting downside for stocks in 2024 (i.e., anyone whose year-end target for the S&P 500 is lower than current spot) is at risk of falling behind the curve.

As ever, bearish forecasts have the potential to make their owners appear as geniuses in the event of a severe drawdown. But the risk with a melt-up is that if equities run too far ahead of your forecast, the scope of the selloff required to get stocks down to your target could become far-fetched. In other words, you could end up being wrong even if you’re right — a reverse Lefty Guns scenario, as I’m fond of putting it. (In Donnie Brasco, Al Pacino’s Lefty famously tells Johnny Depp’s Brasco that “A wise guy’s always right. Even when he’s wrong, he’s right.”)

There’s some career risk in staying bearish into a rising market, which is why strategists tend to lift targets begrudgingly even if they still believe the thesis behind bearish calls. Higher price targets for the index may tempt already antsy investors to buy into the rally, thereby creating a self-fulfilling prophecy.

Arguably, that’s where we are now. Witness this Bloomberg headline: “Fed’s Pivot Is Forcing Stock-Market Skeptics to Become Believers.” The linked article contains a forlorn quote from Piper’s Michael Kantrowitz who, bless him, missed the boat in 2023 (at one point, his year-end target was 3,225). “I was wrong this year on absolute returns for equities by a lot,” he told clients late last week. “I’m trying to remain open-minded, stay with history and my framework, and be willing to swallow my ego and not remain stubborn.”

The average top-down strategist target for the S&P in 2024 is 4,800. Hopefully, you can see the (potential) problem: We’re already there. And it’s still 2023.

With all of that in mind, SocGen’s Jitesh Kumar pointed to the somewhat odd juxtaposition between a very subdued VIX and the range of S&P 500 forecasts for 2024.

As the scatterplot shows, strategist uncertainty, proxied by the forecast range, is quite high considering the backward-looking average VIX level.

“The uncertainty in forecasts for end-2024 is almost twice what we would expect based on the regression,” Kumar wrote this week. “This uncertainty is exemplified by some strategists having to change their price targets merely a few weeks after originally writing their year-ahead outlooks last month!” he went on to exclaim.

Goldman’s David Kostin lifted his S&P target to 5,100 just a month after publishing his outlook for the new year, which included a 4,700 target for the benchmark.

On Monday, one reader asked if Morgan Stanley’s Mike Wilson raised his target in light of what, for Mike, counted as conciliatory remarks around the prospects for stocks in a Fed pivot. The answer is “no.” Wilson’s year-end 2024 target remains 4,500. For now anyway.