Stocks are not in a bubble, investors should keep buying, Wells Fargo has said

The stock market had a stellar performance in 2024, but Wells Fargo warns that the euphoric postelection rally could soon lead to a short-term "hangover," with the S&P 500 potentially dropping by as much as 7%.

In a note released Monday, Wells Fargo highlighted a growing disconnect between equity markets and the economy. U.S. indexes have surged since the presidential election, despite economic data that has largely failed to impress.

The Bloomberg U.S. Economic Surprise Index, which measures how economic data compares to market expectations, remains just above zero. This indicates a lack of significant positive surprises, even as bullish sentiment continues to propel the market higher.

"This is concerning, given the level of positive positioning in equity markets since the elections," said Sameer Samana, senior global market strategist at Wells Fargo. "Investors seem focused on the potentially brighter future while disregarding the current underwhelming data. Eventually, this disconnect will need to be resolved."

Technical Indicators Signal Potential Overbought Conditions

Samana also pointed to technical signals suggesting stocks are nearing "overbought territory." He cautioned investors to "beware the hangover" that could follow the current rally.

The S&P 500 hit 5,964 on Monday, trading above its 50-day and 200-day moving averages. However, Samana believes the index could face resistance at its recent high of 6,090. If the index trends downward, it could find support around its 200-day moving average of 5,515, implying a potential 7% pullback from current levels.

Long-Term Optimism for 2025

Despite these near-term risks, Wells Fargo remains optimistic about stocks in 2025. The bank previously projected the S&P 500 could end the year between 6,500 and 6,700, supported by a favorable economic backdrop and strong corporate earnings growth.

Diverging Views on Wall Street

Other Wall Street analysts have expressed caution, citing the S&P 500's remarkable climb this year. BCA Research, for instance, predicts a potential bear market early next year due to historically high stock valuations and possible economic headwinds in the U.S.