Wall Street bulls, often criticized for being market cheerleaders, weren’t bullish enough on stocks this year.
And that could be a bad thing for 401(k) investors who followed their advice and invested conservatively this year, or a good thing if they ignored the skepticism and were more aggressive.
At the start of 2017, 5.5% was the average gain predicted for the Standard & Poor’s 500 stock index by top strategists at 19 Wall Street banks — and that number turned out to be way too low. The broad stock index is up 15.7% this year and has posted 52 record highs.
Given the surge in stock prices, it’s no surprise that three-quarters of market gurus have since boosted their 2017 return predictions for the S&P 500, an index of large U.S. stocks that many fund managers and investment strategists are compared against.
But even the current average year-end price target of 2,525 is 2.6% below Monday’s close of 2,591 for the S&P 500.
The call: There’s a “very good chance” that the market will climb enough to reach 2,650 in the coming weeks, Stoltzfus says. The S&P 500 will need to rise a bit more than 2% to get there.
That bullish call is built on expectations of continued economic strength and better business conditions, he says. He points to two straight quarters of U.S. GDP growth above 3%, healthy demand for purchases of long-lasting goods like refrigerators and dishwashers, rising quarterly profits for U.S. companies, and economies around the globe all gaining strength at the same time, which is key, he says, because we are in a “totally linked” world. Stocks could also get a lift from bears, or market skeptics, finally capitulating and buying stocks like everyone else.
“That’s what does it,” says Stoltzfus, referring to the path he sees to 2,650.
He doesn’t see either the changing of the guard at the Federal Reserve, where Jerome Powell has been tabbed as chair, replacing Janet Yellen, or the uncertainty surrounding changes to the U.S. tax code, as market “deal breakers” at this time.
If the House Republican proposal to reduce the corporate tax rate to 20% from 35% gets passed, it would be considered a “positive for the bottom lines” of U.S. corporations. And while he doesn’t think the high-flying tech industry is “bullet-proof or Teflon,” he downplays concerns that shares of top companies like Apple and Facebook are overly frothy, mainly because their earnings reports have been so strong. But given that tech accounts for nearly 25% of the S&P 500, he recommends that investors avoid devoting more of their portfolio to tech than they currently have baked in.
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HINGING ON TAX PLAN
The target: 2,550
The firm: J.P. MORGAN
The strategist: DUBRAVKO LAKOS-BUJAS
The call: The S&P 500’s next move could pivot on tax reform success in Washington, says Lakos-Bujas. His current 2,550 price target, which is about 1.6% below the S&P 500’s current level, does not include expected earnings benefits U.S. companies would enjoy if their tax rate was reduced, he says.
Lakos-Bujas sees the market heading higher – perhaps as high as 2,700 – if the House Republicans’ proposal to reduce the corporate tax rate goes through. Even if that rate is reduced to 25%, it would translate into 150 points of additional gain for the S&P 500. That would put the index within striking distance of 2,700, a recent analysis by J.P. Morgan found.
“It would provide an additional tailwind, especially for corporate earnings,” Lakos-Bujas says.
Depending on how big a cut there is in corporate taxes, earnings for the overall S&P 500 index in 2018 could rise anywhere from $6 to $7 per share above J.P. Morgan’s current estimates to as much as $11, $12 or $13, he says.
If the corporate tax rate were cut, types of stocks that would fare best include: domestic U.S. companies, which have higher effective tax rates than their multinational counterparts; banks, which could benefit from higher interest rates if growth picks up; and value stocks, which have posted smaller returns than growth stocks and could enjoy renewed interest and cash flows from investors.
Lakos-Bujas says a continuation of improving global GDP is needed. It would offset any “headwinds” that might follow from the Federal Reserve and other global central bankers staying on their path of raising interest rates back to more normal levels following years of keeping them historically low since the financial crisis.
CHANCE OF A PULLBACK
The target: 2,475
The firm: CITI RESEARCH
The strategist: TOBIAS LEVKOVICH
The call: While Levkovich may now have one of the lower S&P 500 price targets, his initial 2,425 call was the fourth-highest at the start of the year. He has no intention of boosting his current target again this late in the year.
He won’t say stocks or market valuations won’t go higher. That’s because there’s still “excitement” over corporate tax cuts, improving corporate earnings and the possibility that investors who missed much of the rally could jump in and start buying. But he still believes the “market is a little ahead of itself” and that a “little bit of a pullback” may occur as the year winds down.
Still, to say Levkovich is bearish on stocks would be misleading. He has already slapped a 2,675 price target on the S&P 500 for 2018, which means he is betting on higher prices. His target for next year is more than 3% above current levels. He sees S&P 500 earnings growing 8% in 2018. That projection could rise depending on how big a tax cut corporations get from Congress. He’s also watching valuations, which he says are above-average but not at the point of, “Oh, my god, run for the hills.”
The market, he says, will be driven by profits.
“If you are looking ahead to next year, you need earnings to carry you because the economy is likely to be stronger and the Fed will be raising rates,” Levkovich says.