The stock market’s stunning rally could be followed by the ‘Hangover’: Wells Fargo

• The euphoric rally in the stock market may be approaching a “hangover,” according to Wells Fargo.
• The post-election surge in stocks appears detached from the economic data, the bank said in a note.
• This disruption needs to be resolved, which could mean a correction in shares, the firm added.

2024 was a terrific year for the stock market. However, the post-election euphoria could lead to a near-term “hangover” in stocks, with the potential for as much as a 7% drop in the S&P 500, according to Wells Fargo.

In a note on Monday, the bank pointed to the growing disconnect between the stock market and the economy, with US indexes rising higher after the presidential election despite tepid economic data.

The Bloomberg US Economic Surprise Index, which tracks economic data releases relative to market expectations, is hovering just above zero. That suggests the market has had few positive surprises in terms of economic data in recent months, despite bullish sentiment driving the market higher.

“This, in our view, is worrying given the level of positive positioning that has taken place in equity markets since the election. Put another way, it suggests that investors are only focusing on the possibly brighter future while completely ignoring the current disappointments data,” said Sameer Samana, a senior global market strategist at the bank. “Eventually, we believe this disconnect needs to be resolved.”

Stocks are also flashing technical signals that suggest they are close to “overbought territory,” Samana wrote, adding that investors should “beware the hangover.”

The S&P 500 traded as high as 5,964 on Monday, above its 50-day moving average and its 200-day moving average.

In the short term, the benchmark index may hit an upper ceiling at the recent high of 6,090, Samana estimated. If the index were to trend lower, it could “find support” around its 200-day moving average of 5,515, he added, suggesting a 7% pullback from current levels was possible.

Wells Fargo remains bullish on stocks overall in 2025. In an earlier note, the bank predicted the S&P 500 could end the year around 6,500 to 6,700, pointing to a strong backdrop of economic growth and corporate earnings.

Other Wall Street forecasters, meanwhile, have called for a potential downside in stocks given the S&P 500’s staggering rise so far this year.

BCA Research believes stocks could fall into a bear market early next year, thanks to risks from historically high stock prices and potential weakness in the US economy.

Société Générale, the European bank that has warned of a US recession for the past several years, said it still saw a “profit-crushing” downturn headed for the US, as evidenced by weakness in the labor market.