This Year’s S&P 500 Soars by a Staggering 28%... Faces a Test Next Year

Possibility of Upward Trend Breaking or Slowing Down

The S&P 500 index, centered on large-cap U.S. stocks, which has broken its all-time high more than 50 times this year and risen over 28%, is expected to face a test next year, according to a report by The Wall Street Journal (WSJ) on the 8th (local time).

In particular, surpassing a 20% increase for two consecutive years following last year is the first time since 1995, when it rose over 20% for four consecutive years, leading some analysts to be on high alert for the possibility of a slowdown or reversal in the upward trend.

First, major U.S. investment banks (IBs) forecast that the S&P 500 index will yield lower returns next year compared to this year. JP Morgan, Morgan Stanley, and Goldman Sachs expect the year-end target for the S&P 500 index next year to reach 6500. This represents a 6.7% increase from the closing price on the 6th (approximately 6090). Barclays (6600), Bank of America (6666), and Deutsche Bank (7000) have more optimistic forecasts, but these still fall far short of this year’s gains.

WSJ reported, “On Wall Street, there is generally no disagreement that the pro-growth policies of U.S. President Donald Trump will greatly benefit stocks,” but “some still see high interest rates, geopolitical turmoil, and potential trade wars as factors that could derail the market rally.”

Uncertainty about how long the artificial intelligence (AI) boom will continue is also a factor increasing market concerns for next year. Recently, evaluations by global leaders and institutions highlighting the AI bubble theory have surged. According to U.S. economic media CNBC, Sundar Pichai, CEO of Alphabet (Google’s parent company), warned of a slowdown in AI development at last week’s New York Times DealBook Summit, saying, “The low-hanging fruit is gone.”

According to MarketWatch, Vanguard, one of the top three U.S. asset management firms, recently raised the AI bubble theory, stating, “Assuming AI technology causes productivity innovations similar to computers, there is a 60-65% chance AI will have a greater impact than computers, whereas today’s U.S. market is pricing in a 90% probability.”

WSJ added that the continued strength of the strong dollar is also expected to act as a negative factor for the U.S. stock market, as it weakens the profitability of U.S. companies operating overseas. The slowdown in consumer spending among low-income groups in the U.S., which is not reflected in statistics, is similarly concerning. Logan Moulton, Senior Portfolio Manager at Intelligent Wealth Solutions, said, “When consumers are struggling, it becomes harder for companies to set higher targets.”

Wall Street’s long-term growth rate forecasts for the U.S. stock market are even more pessimistic. Goldman Sachs and Bank of America predict that the S&P 500 index will yield annual returns of 3% and 1%, respectively, over the next 10 years.

However, the Russell 2000 index, which is considered a gauge of the U.S. domestic economy and is focused on small-cap stocks, showing strength in the second half of the year, is seen as a factor adding optimism to next year’s stock market. Last month, the Russell 2000 index’s rate of increase was reported to be double that of the S&P 500 index over the same period.