New York: You know a rally is moving into overdrive when it exceeds even the imagination of Wall Street stock forecasters.
Equity strategists, a group not exactly known for their scepticism, are seeing their best guesses left for dead as the S&P 500 Index piles on gain after gain, including five straight weekly rallies. At 2,553, the benchmark gauge now sits 53 points above the most optimistic of the 18 predictions that Bloomberg compiled at the start of 2017.
The rally has come as a surprise to many. From stretched valuations to elevated policy uncertainty, things that strategists pointed to 10 months ago as reasons for a subdued market have stayed largely in place or gotten worse. Yet stocks keep rising as investors brush aside threats from North Korea to politics to Federal Reserve tightening.
Strategists have been forced to play catch-up. On Friday, two lifted their year-end target by at least 200 points: Tom Lee at Fundstrat Global Advisors and Weeden & Co.’s Michael Purves.
“It’s been tough,” said Lee, whose projection now stands at 2,475. “The market has been incredibly strong. It’s been characterised by substantial multiple expansions, low volatility and no market drawdown. It’s a pretty unusual year and really got people off guard.”
Missing the rally has been painful, with more than $3 trillion added to US share prices this year. But even after the upgrades, professional forecasters are hardly raging bulls. At 2,524, their average estimate represents a 1 per cent decline in the S&P 500.
While it’s not uncommon for the index to surpass the consensus during the course of a year — it happened in June — it’s rare that the prediction of the biggest bull falls short. In fact, it’s only the second time since 2009 that everyone under-estimated the market’s upside. When it occurred in 2013, the S&P 500 jumped almost 10 per cent in the fourth quarter.
‘No crime’
Purves raised his forecast to 2,600 from 2,350, citing the potential for valuations to fatten from their already lofty levels. The brightened outlook for the global economy and President Donald Trump’s plans to cut taxes has bolstered stocks along with falling bond yields and the dollar, he said.
“There’s no crime in revising your numbers if that’s what you think is the right thing,” Purves said. “All of us have traded a lot of political risks this year and I really do think if Trump got that agenda done early, as everyone was envisioning it in the first 100 days, you would’ve seen a big excitement. And then if rates and the dollar stayed up you would’ve started seeing a lot of indigestion.”
Bulls and bears are becoming blurred among strategists, but it’s hard to say the same for individuals. Equity exchange-traded funds and mutual funds have seen outflows in all but the first three months of 2017, with withdrawals totalling $45 billion, data compiled by Bloomberg and Investment Company Institute show.
“Most clients are still skittish and bitter because they missed the rally and they’re waiting for the pull back,” said Brian Belski at BMO Capital Markets. “When you’re looking for a correction, one rarely happens.”
