• The euphoric rally in the stock market could be headed for a “hangover,” according to Wells Fargo.
• The stock rally after the election appears to be unrelated to the economic data, the bank said in a statement.
• This discrepancy needs to be resolved, which could mean a correction in shares, the company added.

2024 was a great year for the stock market. However, the euphoric post-election rebound could cause a short-term “hangover” for stocks, with the possibility of the S&P 500 falling as much as 7%, Wells Fargo said.

In a note on Monday, the bank highlighted the widening gap between the stock market and the economy, as US indexes rose after the presidential election despite tepid economic data.

The Bloomberg US Economic Surprise Index, which measures economic data releases relative to market expectations, is just above zero. This suggests that the market has experienced few positive economic data surprises in recent months, although optimistic sentiment has pushed the market higher.

“This is worrying in our view given the positive positioning that has taken place in equity markets since the elections. In other words, it suggests that investors are only focusing on the potentially better future while completely ignoring the current disappointing data,” said Sameer Samana, a senior global market strategist at the bank. “Ultimately, we believe this discrepancy needs to be resolved.”

The stocks also have technical signals that suggest they are near “overbought territory,” Samana wrote, adding that investors should “beware of 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 near term, the benchmark index could cap at its recent peak of 6,090, Samana estimated. Should the index trend down, it could “find support” around its 200-day moving average of 5,515, he added, implying a 7% decline from current levels is possible.

Wells Fargo remains bullish on stocks overall in 2025. In an earlier note, the bank forecast that the S&P 500 could end the year at around 6,500 to 6,700, indicating a strong environment for the economy and corporate earnings growth.

Meanwhile, other forecasters on Wall Street have predicted a possible decline in the stock market given the S&P 500’s dizzying rise this year.

BCA Research believes stocks could enter a bear market early next year due to the risks of historically high stock prices and possible weakness in the U.S. economy.

Société Générale, the European bank that has warned of a U.S. recession in recent years, said it was still monitoring a “profit-destroying” downturn toward the U.S., reflected in weakness in the labor market.