The Case for Contrarianism

Last week, a reporter asked me to comment about the apparent clustering of bullish outlooks among Wall Street strategists.  Interestingly, at the time, she didn’t know that I am perhaps the lone strategist with a bit of an outlying view – she simply knew that I am willing to offer iconoclastic opinions.  The story ran today, utilizing one of the comments I made to her, but it was only one part of an extensive discussion.  I’ll offer the rest of my commentary here.

The background is that according to data compiled by Bloomberg, strategist forecasts for the S&P 500 (SPX) for year-end 2026 range from 7,000 to 8,100. (Yes, faithful readers know of my 6,500 forecast, and I learned today of another at 5,280.)  That is of course uniformly bullish – though if the “Santa Claus rally” goes as planned, a test of 7,000 seems all but inevitable before year-end.  The article goes on to state that the range in forecasts is the tightest since 2017, meaning that not only is there a consensus about the direction of next year’s move, but there is a general one about its magnitude.

When presented with this data beforehand, my initial reaction (now published) was this:

The unanimity and the clustering of outlooks is concerning to me… If everyone is expecting the same thing, then by definition, it’s already priced into the market — especially when the rationales for the consensus outlooks are so often predicated upon similar foundations like rate cuts, tax cuts, and continuing dominance of AI.

I then went on to explain some of the reasoning behind that assertion.  For starters, I do have a bias towards contrarianism.  The bulk of my career was spent managing risks for a multi-billion dollar, algorithmically and systematically driven, options market-making portfolio. The model made money under most circumstances as long as we avoided catastrophes, and it was my job to figure out what might upset the normally smooth functioning of the model.  (In this, the inaugural IBKR Podcast, I outlined how we avoided major losses on financial stocks during the Global Financial Crisis.)

Stocks in general do go higher over time, and thus it is understandable why it makes sense to expect the prevalent prior outcome to occur in the near future – especially when one can easily denote reasons to justify it.  But I’ve also seen that the market has an occasional nasty tendency to make the maximum number of people miserable at the worst possible time.  When it occurs – rarely, I should add – it’s because the market has finished scaling the proverbial wall of worry.

Put simply, be fearful when others are greedy.  Or, as the “Oracle of Omaha” originally put it, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

The not insignificant amount of good news already priced in includes: an accommodative Federal Reserve that will cut rates at least once, if not twice; SPX earnings to grow by about 14%; and a fiscal bump from the recently passed tax law.  It seems like folly to think that these would not benefit stocks.  Those expectations have been a boon to markets and it’s logical that they will continue to be.  But as noted above, if they’re already well-expected, then they’re also already priced in.  One must consider whether simply meeting those expectations will be sufficient.  If not, then we could see disappointment even amidst a good investment climate.  And if they are not met, then the disappointment could morph into something much worse.

When I told the reporter about my non-consensus SPX price target, she said, “I am conflicted between rooting for you to emerge victorious next year and rooting against you for the market and investors’ sakes.”  My response was, “As I said at the end of the piece [my strategy outlook], ‘I kind of hope I’m wrong.’”