Somebody tell Wall Street to calm down

Trying to predict how the stock market will move is an age-old conundrum, and an endeavor that rarely proves fruitful long-term. You’d think that Wall Street analysts would have a better idea than the rest of us.

But they’re not infallible. Wall Street equity researchers have been caught a step behind when it comes to economic meltdowns in the past. According to one strategist who spoke to MarketWatch, analysts can be as much as 30% too bullish during peaks preceding economic crashes.

Now, some investors are questioning whether equity analysts’ lofty forecasts for 2025 are painting too rosy a picture of the economy right now—especially when economic data is flashing warning signs about a larger slowdown as the Fed gears up for rate cuts.

Let’s get real

Overall, Wall Street is projecting huge corporate earnings growth over the next year, signaling their optimism about the economy. After all, it’s difficult for companies to make money in a recession.

Analysts predict that S&P 500 earnings will rise over 15% by the end of 2025—above their original projections of 12.8% at the beginning of this year, and far faster than 2024’s projected earnings growth of about 11%.

At the same time as Wall Street is raising hopes of strong growth next year, the Federal Reserve is digesting a slew of less-than-stellar economic reports. The labor market is slowing down, inflation is decelerating but still sticky, and US manufacturing numbers are lower than economists anticipated.

The Fed is expected to start cutting interest rates next week. But the size of the rate cut, and the pace on the way down, is still unclear. And as consumers continue to face inflationary pressures, corporate profits could take a hit.

Wall Street says the economy will keep growing, and so will earnings. The Federal Reserve says the economy is slowing. Who’s right?

Rather than try to time the market or bet on it heading in one direction or another, experts advise investors to take some of the most rosy analyses with a grain of salt, and stay diversified across stocks and fixed income.—LB