January 7, 2016 | by Justin Capetola
With the bull market entering its seventh year, strategists on Wall Street are expecting another year of gains but with more volatility along the way. Last year market strategists were looking for a rise in stocks of 10% or more. There were several issues that caused stocks to lag in 2015: the uncertainty surrounding the Federal Reserve’s decision of whether or not to raise interest rates, the continuing decline in oil and commodities, a strong dollar, and China fears of a devalued yuan. Despite many of these same headwinds still looming all of the strategists we researched remain optimistic for the stock market in 2016 with an average prediction for the S&P 500 to gain 8.30%. Analysts cite continued economic growth, increased consumer spending, and fair stock market valuations as reasons for the 2016 election year to end in positive territory.
Below is a complete list of the strategists, their projections for the S&P 500, as well as selected commentary.
*Percent change is based on the S&P 500 close of 2043.94 on 12/31/15.
Goldman Sachs – David Kostin – 2100
“We forecast the S&P 500 index will tread water for a second consecutive year in 2016. Our year-end 2016 target of 2100 represents a 1% price gain from the current index level (2089), which itself is just 1% above the year-end 2014 level of 2059. Including dividends, we expect the total return in 2016 will equal 3%.”
“The domestic consumer economy is strong but many industrial companies cite a contraction in business activity. Growth equities are outperforming value which is a pattern that occurs when economic growth is weak. Cyclicals have lagged sharply led by Energy and Materials but defensive sectors trade at stretched valuations.”
Kostin said “2016 will be “déjà vu all over again.” Historically low market breadth — meaning that a few large-cap stocks are supporting the market — and the specter of rising interest rates are keeping the index in a narrow trading range.”
Credit Suisse- Andrew Garthwaite – 2150
“We reduce our mid-2016 target for the S&P 500 to 2150 (from 2200), and introduce a 2016 year-end target of 2150,” Garthwaite wrote. “Our fair value P/E model for the S&P 500 suggests a target multiple of 16.9x compared to 16.6x now, suggesting only 2% upside,” he noted.
“Our concerns are: increasing macro headwinds (deflation exported by China, the first Fed rate rise in 9.5 years); US equity valuations are now at fair value; there are several warning signals (credit spreads widening, buybacks as a style underperforming, M&A activity reaching problematic levels, a decline in market breadth, earnings momentum at a 4-year low); the shift of power from capital to labor; and conventional business models are being disrupted,” he said.
“The US equity market has tended to peak on valuations around 1.2 standard deviations above their 10-year average (1.8 sd during a bubble period), while the S&P is currently trading on a P/E multiple 1.0 sd above its 10-year average. We reduce our weighting in equities to a small overweight, our most bearish strategic stance on the asset class in seven years,” Garthwaite said.
Barclays- Jonathan Glionna – 2200
“We maintain our view that return expectations should roughly match EPS growth expectations,” he added. “In other words, we do not expect any more expansion in valuation multiples. Our S&P 500 price target for the end of 2016 is 2200.”
“Our macro narrative is simple, if obvious,” Barclays’ Jonathan Glionna said. “We believe U.S. interest rates will go up leading to a stronger U.S. dollar. This should cause earnings per share growth and returns to remain subdued. We forecast 4% EPS growth and a 5% gain for the S&P 500.”
Deutsche Bank- David Bianco – 2250
“Strong private equity activity, public company share repurchases and increased M&A throughout the world shows that the persistence of low interest rates vs. real asset valuations will cause investors to chase existing income producing assets and bid up prices,” he noted. “If long-term yields stay low as the Fed increasingly steps aside, equity valuations are likely to climb higher and corporate managers will also come to more accept lower returns on potential new projects.”
“Energy is a value trap,” he writes. “At Energy’s current $1.3tr market cap, market-implied normalized Energy earnings are $90bn in 2016, if a fair forward PE on normalized earnings is assumed to be 15x,” he explained. “$90bn+ of normalized earnings would imply that either an 80% gain in profits will occur on a 40% gain in oil price (to $65-70) for the entire sector, or that the market assumes oil prices will normalize above $65-70/bbl.”
Blackrock- Russ Koesterich – 2175
“Stocks will face obstacles in 2016 similar to those seen in 2015. Valuations on U.S. equities remain elevated by most measures, particularly based on long-term cyclical earnings. Profit margins are likely to remain under pressure as wages firm. In addition, should the dollar appreciate further, this will negatively affect companies dependent on exports.”
“We have only modest expectations for U.S. equities in 2016, and would not expect a revisit of double-digit returns. We also expect bonds to continue to struggle as interest rates drift higher on the back of Federal Reserve tightening and some stabilization in inflation expectations.”
Jefferies- Sean Darby – 2100
“The one theme that worked well in 2015 and is likely to do so again in 2016 is to tactically hold cash,” “Doing so will give investors a chance for “buying the ‘dips’,” a strategy worth pursuing as developed-market stocks and government bonds look expensive,” he wrote.
“Investors ought to be more mindful of valuations,” Darby wrote. “Central banks’ efforts to revive growth through bond buying and other monetary policies have already imprinted high return expectations in some equity markets well before the economies have recovered.”
Citigroup- Tobias Levkovich – 2200
“We’re seeing businesses looking to hire. We’re seeing them looking to add CAPEX. We’re seeing them doing mergers and acquisitions,” he said. “They’re doing all the things that would intimate a revival of corporate animal spirits—that’s when you remove accommodation. That’s normal.”
“We see large-caps outperforming small-caps (in the U.S.), while valuations also favor larger companies,” Citi added in the note. “A rising bond yield should support an investment style change towards value stocks over growth.”
Bank of America- Savita Subramanian – 2200
“So while returns may compress from the outsized gains we have seen over the last several years, we remain constructive on equities. The bull market in stocks is not over, in our view.”
“Stocks certainly look more attractive than bonds,” Subramanian writes, “[but] the case for stocks versus other asset classes is less clear.”
“[Bank of America Merrill Lynch’s] Sell Side Indicator, which tracks Wall Street Strategists’ average recommended allocation to US equities, currently sits at just 52%,” Subramanian notes. “This is up from the all-time low of 43% we observed in July 2012, but well below the historical strategic equity allocation of 60-65%.”
BMO Capital Markets- Brian Belski – 2100
Brian Belski has a 2016 year-end target of 2100 on the S&P 500. “However, we continue to believe the longer-term outlook for US stocks remains bright, and we remain confident with our call that US stocks are in the midst of a secular bull market.”
“Given that we have reared an entire generation of investors that seem to believe it is appropriate to buy stocks only when interest rates are going down, any major change in trend — namely, the messaging and pace of additional Fed moves — will likely cause the most trepidation” Belski noted. “The uncertainty of the 2016 Presidential election won’t help stocks,” he said.
“In terms of portfolio construction, we believe investors should remain focused on growth in the first half of the year, but eventually shift to value in the second half of the year,” Belski wrote. “We also favor high-quality large-cap stocks, with strong cash flow, earnings consistency, and brand power.”
RBC Capital Markets- Jonathan Golub – 2300
“2015 was marked by falling oil prices, a diminishing global growth outlook, and flat rates,” Golub wrote to clients on Friday. “Our constructive 2016 outlook is predicated upon stabilizing commodity prices, and an incrementally higher dollar and rates. All of this should result in a substantially higher earnings trajectory as well as a modest re-rating of stocks.”
Fundstrat Advisors- Tom Lee – 2325
“I don’t think the bull market’s over,” says Lee. “We’re going to get 2,300 on the S&P 500 and the principal driver will be the opposite of this year: we’re going to get an earnings surprise and the upside will come from the potential for the dollar to be flat or potentially weaken.”
Morgan Stanley- Adam Parker – 2175
“We are viewing this as a mid-expansion period where equity returns are not strong (much like 2015 so far), instead of the end of the expansion,” Morgan Stanley strategists wrote on Sunday. “Should investors regain confidence that the US economy and corporate behaviors will not lead to a substantial earnings correction, we think the market could begin a more meaningful acceleration path.”
“While a high percentage of companies were able to show year-over-year margin expansion this year, the combination of muted revenue and negative factors in industrials, energy, and materials, and less benefits from lower oil in terms of consumer spend and lower input costs, have caused us to reduce our 2015 EPS outlook from $124 to $120.5,” the analysts added. “We also lowered our 2016 EPS from $128.5 to $125.9 and set 2017 EPS at $131.4.”
“We adjust our allocation recommendations accordingly, lowering our position in equities and deploying more money in credit,” the analysts said. “Such a switch may seem inconsistent with a market where corporate activity is becoming more aggressive, as such periods are usually marked by equity outperformance. But this time we think things will be somewhat different. Relative to prior later-cycle periods, growth looks weaker, central bank policy looks looser, and credit risk premiums are more elevated.”
Canaccord Genuity- Tony Dwyer – 2360
“We are initiating a 2016 target of 2360. We are using 2016 SPX operating EPS of $124 and a 19x multiple, which is the average multiple when core inflation is between 1-3%,” says Dwyer.
“We reiterate our bullish intermediate-term view due to the combination of a still-positive core fundamental thesis and the post-crash history in the context of an ongoing bull market. While we still think another move to the lower end of range is possible, we believe it is time to focus on the intermediate-term opportunity rather than the very near-term risk.”
He states, “While Corporate Credit has been under pressure, it has been largely limited to the commodity-related sectors. We are watching corporate paper and CDS very closely to get a sense of a more problematic spread of credit tightening. We believe the move out of the bottoming process should be led by the areas that have seen the most damage as was the case in 2011. As a result, last week we moved the Energy, Materials and Industrials sectors to “equal weight” from “underweight” while moving Consumer Staples, Utilities and Telecom to a slight “underweight.” Our fundamentally favorite sectors remain Financials, Info Tech and Consumer Discretionary.”
UBS-Julian Emanuel – 2275
“The volatility regime has shifted higher as rising risk is quite normal at this point in the market cycle where the rally is maturing and the Fed is poised to begin raising interest rates,” Emanuel wrote.
“At 81 months and counting, the current bull market is one of the longest on record. That said, no bull market since before the 1970’s has ended without a recession and both our US Economics team or our US Credit US Equity and Derivatives Strategy team do not forecast a near term recession. Simply put, barring an unforeseen external shock or a recession, if earnings continue to improve, 2016 should be a positive year for US equities. Regardless, we continue to expect further volatility – which in essence means higher risk, both upside and downside.”
JP Morgan Chase- Dubravko Lakos-Bujas – 2200
“Negative earnings effect from energy is likely to fade away, but strong [U.S. dollar] will continue to exert some drag causing further negative revisions to current 2016 earnings growth estimates,” wrote Lakos-Bujas.
S&P Capital IQ- Sam Stovall – 2250
“An 8% rise in earnings-per-share growth, with all sectors gaining except energy, should push the S&P 500 to 2250 by the end of 2016,” Stovall noted. “Expect volatility to pick up in 2016, however, just as it did in 2015 with the rolling number of days the S&P 500 advances or falls more than 1% on the rise,” Stovall said.
“But higher volatility doesn’t exactly translate into low returns — quite the opposite, using historical data. Going back to 1945, if you take all the years where the S&P 500 traded within a range of less than 16%, the index was up 57% of the time. In the years where the range was 36% or more, the S&P 500 finished up 79% of the time.”
“Solid performances during the third years of the presidential cycle: Since 1945, the S&P 500 gained an average 15% during the third year of the presidential cycle, and rose in price 88% of the time. In the 12-months (October to October) surrounding mid-term elections, the S&P 500 rose in price 17 of 17 times, gaining an average 17.5%”
“A stock-market correction still looms: The S&P 500 has gone 38 months without a decline of 10% or more, versus an average of 18 months since WWII (and a median of 12 months). In addition, the S&P 500 endured 30 declines of 5% or more during third years of the presidential cycle, yet still recorded above-average full-year price gains”
Piper Jaffray- Craig Johnson – 2350
“Our technical analysis suggests a measured move in 2016. We looked at the S&P 500’s consolidation from 2000 to 2013 and applied a breakout level to that range that suggests a price objective of 2,350.”
Oppenheimer- John Stoltzfus – 2300
“We are initiating a 2016 year-end price target for the S&P 500 of 2300 which reflects our expectations that the economy will continue to improve stateside and outside the US but that the dollar’s strength and oil price weakness will persist to negatively affect US multinationals’ revenue and earnings in the first half of the New Year,” Stoltzfus said.
“We look for S&P 500 earnings to grow around 8% in 2016 to $129 per share and for the benchmark to end the year at 2300, implying a P/E multiple of 17.8x expected earnings.”
“While we look for oil to find a bottom from which to rally and opportunity for the dollar’s momentum to ease over the course of 2016, the transitions taking place across the global economic landscape both in the corporate sectors and in the commodity complex remain highly disruptive and prone to generate near-term volatility in the markets,” he said.
Societe General – Alain Bokobza – 2050
“The S&P 500 should absorb the Fed rate hike and finish the year flat. US dollar strengthening and high bond yields offset the strong US GDP growth already priced in. The presidential election in November 2016 could also be a source of volatility for US equities,” said Alain Bokobza.