The perennial penchant for bullishness among Wall Street strategists has looked a little shaky of late, but that isn’t keeping them from their annual ritual of predicting another up year for stocks.
To date, Bloomberg has gathered 14 forecasts for 2019 from the firms it tracks, and so far the average prediction is for the S&P 500 to rise 11 per cent to 3,056 by the end of next year. While the steepness of the trajectory partly reflects the damage done to stocks since September, it’s the most optimistic call since the bull market began in 2009.
The resilience contrasts with the mood among investors, where individuals are raising cash at the fastest pace in three years and hedge funds are going defensive. As scary as the equity rout has been since October — the S&P 500 entered a correction and is still down by almost 6 per cent from its record — little evidence exists that a market crash is looming, the prognosticators say.
Growth is decelerating, but corporate profits are still expanding. The threat of a trade war and higher interest rates is real but the fear probably has gone too far, as reflected in a steep decline in valuations. So says Credit Suisse’s Jonathan Golub, who has the most optimistic target at 3,350.
At 15.8 times forecast earnings, the S&P 500’s multiple has contracted 15 per cent from a year ago, hovering near the cheapest level since early 2016. Two things feed that: stocks sitting still, and profits jumping almost 25 per cent.
“We have pretty strong valuation support for the market. I think investors are too bearish,” Dan Veru, chief investment officer at Palisade Capital Management, said by phone. “They are taking these near-term headwinds, drawing a straight line, and given how long this expansion has been in place, saying this has to be the beginning of the end. My view is, we’re in the fifth inning of a nine-inning ball game.”
Anyone heeding the strategist siren song should be aware of their propensity to lean bullish.
Forecasts off the mark
Since Bloomberg began tracking the data in 1999, professional forecasters have never once predicted a down year, with the average annual gain coming in at 9 per cent.
Their optimism is being challenged after the two-month sell-off erased almost $4 trillion (Dh14.6 trillion) in equity values and trimmed the S&P 500’s year-to-date gain to 3.2 per cent. With only four weeks left for 2018, their projection for the index to hit 2,942 looks like a long shot. Even after the best week since 2011, the S&P 500 would need to jump roughly 7 per cent to get there. A year-end rally of that magnitude has only happened four times in the last 90 years.
Over the past two decades, strategists’ track record is far from being perfect. While their bullish stance looks prescient when shares are rising, the S&P 500 has exceeded strategists’ target by 4.4 percentage points a year during this bull market. At the same time, listening to their bullish calls during the last two bear markets would have resulted in half your investment being lost.
To be sure, conditions that would warrant a full market meltdown right now are scant. Stocks just rallied as Fed Chairman Jerome Powell dialled back his hawkish view on interest rates. At a scheduled meeting this weekend, US President Donald Trump and his Chinese counterpart Xi Jinping are expected to soothe trade tensions between the two countries. Meanwhile, shares that led the October sell-off, such as chipmakers, homebuilders and banks, are bouncing back.
“Fundamental drivers of growth can persist,” Keith Parker at UBS wrote in a note to clients earlier this month. He sees the S&P 500 ending next year at 3,200. “No further trade escalation, solid but slowing growth and moderately higher rates underpin our view.”
All but one strategists expect stocks to go up next year from where they are now. Yet underneath the buoyancy, a gap is widening. At 22 per cent, the spread between the highest and lowest forecast is the widest since 2012.
Mike Wilson at Morgan Stanley is the least bullish, with a target at 2,750. The pace of profit expansions will slow to 4.3 per cent, one fifth of the rate seen this year, and the odds for two consecutive quarters of negative growth are rising as global demand weakens, he said.
Meanwhile, some sense of caution is creeping up. Even the biggest bull is turning a bit defensive. Golub at Credit Suisse this week downgraded cyclical stocks such as banks, industrials and materials producers while raising recommendations for companies seen offering stable income and dividends, like health-care and consumer staples.
Similarly, Bank of America’s Savita Subramanian urged investors to buy utility stocks as a hedge against market declines. She said the S&P 500 may peak at around 3,000 before retreating to end the next year at 2,900.
“We suspect that we see a peak in equities next year, but bearish positioning and weak sentiment in stocks present upside, especially if trade risks subside, keeping us constructive for now,” Subramanian wrote in a note to clients.