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2015 Year-End S&P 500 Projections

December 29, 2014

crystalball_dollarsWith the bull market entering its sixth year, strategists on Wall Street are expecting another year of gains but with more volatility along the way.

Of the 22 strategists we researched, all remain optimistic for the stock market in 2015, even with an anticipated interest rate hike by the Fed, falling oil prices and weakness in foreign economies. Their median forecast is for a level of 2,225—a 6.45 percent gain in the S&P 500 in 2015—over Monday’s close of 2090.57. The low forecasts come from Goldman Sachs, Barclays and Credit Suisse at 2,100 – a 0.45% gain, and the high target of 2350 – a 12.41% gain comes from Piper Jaffray.  Below is a complete list of the strategists, their projections for the S&P500, as well as selected commentary.

Firm Strategist Projection 2015 % Change
Goldman Sachs David Kostin 2100 0.45%
Credit Suisse Andrew Garthwaite 2100 0.45%
Barclays Jonathan Glionna 2100 0.45%
Deutsche Bank David Bianco 2150 2.84%
Blackrock Russ Koesterich 2160 3.32%
Jefferies Sean Darby 2175 4.04%
Nomura Michael Kurtz 2200 5.23%
Citigroup Tobias Levkovich 2200 5.23%
Bank of America Savita Subramanian 2200 5.23%
BTIG Dan Greenhaus 2200 5.23%
Wells Fargo Gina Martin Adams 2222 6.29%
UBS Julian Emanuel 2225 6.43%
BMO Brian Belski 2250 7.63%
Stifel Nicolaus Barry Bannister 2250 7.63%
JP Morgan Chase Dubravko Lakos-Bujas 2250 7.63%
S&P Capital IQ Sam Stovall 2250 7.63%
Morgan Stanley Adam Parker 2275 8.82%
Oppenheimer John Stoltzfus 2311 10.54%
RBC Capital Jonathan Golub 2325 11.21%
Fundstrat Advisors Tom Lee 2325 11.21%
Canaccord Genuity Tony Dwyer 2340 11.93%
Piper Jaffray Craig Johnson 2350 12.41%

*Percent change is based on the S&P 500 close of 2090.57 on 12/29/14.

Jonathan Glionna, Barclay’s: 2,100
Glionna is backing his relatively bearish target even though low oil prices have historically resulted in positives for the economy and stocks. But it isn’t all bad. In a recent note, Glionna estimates that while lower oil prices could result in a $40 billion reduction in energy-related capital expenditures, consumers will likely save about $70 billion to pour into other areas of the economy. “Declining oil prices will not add to revenue for the S&P 500,” Glionna noted. “Rather, it is a symptom of slow global growth, which remains among our primary concerns.”

“We believe US equities are transitioning out of a recovery rally and into a period of lower returns as the benefits of margin expansion and share repurchases prove to be already priced in and a return of faster revenue growth becomes a prerequisite for another re-rating higher. We expect faster earnings growth outside the US in 2015 and, with lower valuations and a looser policy stance, we prefer “international” stocks over US stocks. One of the reasons this strategy did not work in 2014 was the heavy positioning toward overseas markets established during 2013 and early 2014. This appears much less extreme now and therefore likely to be less of a constraint on our view in 2015.” “[G]lobal equity markets are likely to have to cope with a turn in the US monetary policy cycle during 2015,” he wrote. “Although we doubt that a rise in the Fed Funds rate will have a prolonged damaging effect on the US market, it will likely prove a headwind relative to the looseness of policy elsewhere.”

David Kostin, Goldman Sachs: 2,100
“We forecast US stocks will deliver a modest total return of 5% in 2015, in line with profit growth. The US economy will expand at a brisk pace. Corporations will boost sales and keep margins elevated allowing managements to both invest for growth and return cash to shareholders via buybacks and dividends. Investors will cheer these positive fundamental developments.”

“Many fund managers disagree with our view and believe higher equity volatility will accompany higher interest rates,” Kostin writes. “They argue that once the Fed begins to hike uncertainty will abound regarding the pace of further tightening and volatility will jump. Our response to those arguments is that the interest rate swaption market implies a relatively steady and shallow path of future hikes with volatility remaining quiescent.”

Andrew Garthwaite, Credit Suisse: 2,100
Garthwaite sees the first Fed rate hike as a catalyst for a 10% correction in the S&P 500 based on the average pullback from previous rate hikes. “We remain optimistic on equities for the first half of 2015 but fear a significant market correction in the second half,” Garthwaite noted. “Consequently, our year-end forecast for the S&P 500 is 2,100, below our midyear target of 2,200.” The first half of the year should be supported by a still-high equity risk premium, responses to deflation from central banks, excess liquidity, corporate buying of stocks, and earnings growth, while the back half of the year faces pressure from the Fed rate hike and a peaking of profit margins, he said.

David Bianco, Deutsche Bank: 2,150
“We think the key issue for 2015 is how the US economy, its labor market and its monetary policy compare to the world,” Bianco wrote in a 90-page note on Monday. “If the Fed hikes in 2015, while other central banks ease, as DB expects, then the dollar is likely to further appreciate and keep oil prices weak. The combination of weak oil and a strong dollar will limit S&P EPS growth to a low single-digit rate despite likely 3%+ real US GDP.”
Here’s Bianco’s summary of the top 15 market themes for 2015:

1)    Tough start: S&P likely dips 5%+ in 1Q on EPS cuts and Fed hikes in sight
2)    Stick with strength: We stay overweight Health Care and lower PE big-cap Tech where further PE expansion has most potential and EPS growth is healthy
3)    Domestic cyclicals overweight: Strong US GDP should benefit Banks & Retailers
4)    Slow EPS growth, but strong payouts: DPS growth favored payout play
5)    Keep cautious commodity plays: Wait for oil to stop falling and 4Q reports
6)    Industrial Capital Goods face 3 big macro challenges: China, oil and dollar
7)    Capex motives: Productivity enhancers desired, but not additional capacity
8)    Transports deserve a sector: Transports are more domestic and fuel users
9)    Relive the 1980s?: Weak oil (√), strong dollar (√), more corporate debt usage (?)
10) S&P margins: 10%+ net margins to be challenged, but no mean reversion
11) Be patient, buy the dips: Slow EPS and looming Fed hikes to bring dips
12) Republican Congress: Our focus is on corporate tax policy/ repatriation tax
13) Small caps: A better 2015 than 2014 seen, but large-caps still preferred
14) A lot of unexpected things can happen in a year: Derivatives can help
15) What are normal interest rates and the corresponding fair S&P PE?

Russ Koesterich, Blackrock: 2160
“Expect more episodes of volatility as we enter the new year,” writes Koesterich. “An important driver of that volatility will be markets adjusting to less accommodative U.S. monetary conditions. But on top of that, investors will continue to wrestle with several lingering geopolitical issues, particularly with respect to Russia.”

Lower oil prices, which fell another 6% last week and are now down roughly 45% year-to-date, are a big part of Russia’s problems. According to Koesterich, “plunging oil prices are inflicting real harm on several emerging market countries, notably Venezuela and Russia.”

The drivers of the low-yield environment are falling inflation (contributing to low nominal gross domestic product), a lack of supply of bonds and shifting demographics. For its part, inflation remains low even in the U.S. despite decent economic activity. In November, the U.S. consumer price index fell 0.3%, the biggest one-month drop since 2008. The decline was largely driven by energy prices, but core inflation remains low at 1.7% year-over-year.

Short-term interest rates are likely to rise next year, but the lack of inflationary pressure is providing the Federal Reserve with considerable latitude as it considers raising rates. On Wednesday, the Fed issued a statement that slightly changed the language in its guidance with respect to rate hikes. The Fed added a new clause, indicating that it would be “patient before raising rates,” a seemingly minor nuance that helped ease concerns of a sudden hike in rates.

Sean Darby, Jefferies: 2,175
Jefferies thinks 2015 will bring a “sideways correction” as a result of record levels of short interest and high margin debt, alongside a contraction in share buyback activity, which has been a major use of corporate cash in the last several years. Sean Darby, chief global equity strategist at Jefferies, says that in a bull market that has gotten long in the tooth, a strengthening U.S. dollar is an accelerant for domestic growth and tailwind for certain stocks.

“A strong dollar, falling oil prices and rising household wealth is great for the consumer, and we have had that,” says Darby. Though the dollar has reached its highest levels since March 2009 against a basket of international currencies, it has climbed to that point from lows not seen since the 1970s. The euro has fallen below $1.24, from $1.37 at the start of 2014, while the dollar fetches almost 120 yen, from below 105 in January.

“You want to be playing alongside that cheap dollar [strengthening],” Darby continues. “We think dollar purchasing power is changing over the next 18 months and are looking at U.S.-centric areas to buy.”


Tobias Levkovich, Citigroup: 2,200
Levkovich said the market can move higher even with Fed rate hikes next year, and financial stocks should ultimately benefit. He said he favors tech, and he is watching the beaten down energy sector for opportunities at some point.

Currently, Levkovich sees limited upside for US stocks through the end of the year, and has a 2,200 year-end target for 2015, but clients in Asia saw this target as being too limited and conservative.

“A 10% total return in the next 13-14 months was perceived as being too conservative by many even as our year-end target is in line with mean and median top-down forecasts,” Levkovich writes. “Interestingly, several clients suggested that our outlook was far below the bullishness expressed by other even when our numbers are pretty much well within the Street’s consensus.”

Levkovich chalks up some of this fervent bullishness from foreign investors on the US market to more challenged domestic economies and the unexpected strength witnessed in the S&P 500 this year.

Savita Subramanian, Bank of America: 2,200
“Stocks certainly look more attractive than bonds,” Subramanian writes, “[but] the case for stocks versus other asset classes is less clear.”

Subramanian notes that gold and oil are now particularly cheap against stocks on a historical basis, and she expects that stocks will rise in-line with earnings growth. Despite the modest upside forecast, Subramanian still sees plenty of reasons to buy US stocks.

“[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%.”

And so with investors likely underinvested in stocks, this is a bullish sign.

Subramanian also says that though the aging — and retiring — US population is often cited as a negative for stock, Boomers will need both income and capital appreciation, making the S&P 500’s dividend-paying members attractive to these investors.

To this end, Subramanian sees “big, old and ugly” stocks as potential leaders in 2015, and says investors ought to consider leaving the “new, shiny, exciting IPOs alone.”

And overall, though Subramanian expects more modest gains in 2015, she says the bull market is still intact.

Dan Greenhaus, BTIG: 2,200

“We believe the bias for stock prices in general remains to the upside, underpinned by a growing economy, low interest rates and increasingly, cheaper oil,” Greenhaus writes.

“With operating margins at elevated levels, top line growth is poised to more quickly bleed through to the bottom line, thus supporting earnings.”

Greenhaus says that the strength of the dollar, however, should weigh on international earnings, while the decline in oil prices will weigh on energy stocks. Greenhaus also notes that the market will likely have to contend with the Federal Reserve’s first interest rate hike in 2015, and historically, the stock market has not performed well after the Fed raises rates. Following rate hikes in 1999 and 2004, the S&P 500 fell 12% and 7%, respectively, within the next five months. And so although Greenhaus sees S&P 500 earnings growing by 6.7% to $126 in 2015 with GDP growth coming in closer to 3% — up from 2014’s 2% rate — another huge year of gains for the stock market will be hard to come by.

Gina Martin Adams, Wells Fargo: 2,222

“I think next year is going to be all about these moving parts. The cross currents for global liquidity are changing a lot of the relationships that have been in play for the last four years,” said Gina Martin Adams, institutional equities strategist at Wells Fargo Securities. “Active asset managers will see some divergences develop. All boats will no longer be lifted by the rising tide.”

Adams expects the S&P to end 2015 at 2,222, and she sees earnings helping boost gains. “Throughout this last earnings season and even through the last couple of months, analysts have given up on earnings prospects, anything with international exposure, energy exposure,” she said.

She expects earnings growth of about 7 percent for 2015. “Earnings estimates for the next four quarters actually look achievable. Given how much they slashed and burned their expectations for 2015 earnings growth, they look achievable. … Next year is really an earnings story.”

Fourth-quarter earnings could be a “kitchen sink” type of quarter, especially for energy companies and those that might have been hit by a rising dollar or weak international markets. “I expect it to be rough,” Adams said, adding she sees a volatile first quarter for the market. “Really, the first quarter will be the first quarter where we see no QE at the Fed and potentially new QE (quantitative easing) from the ECB (European Central Bank).”

Julian Emanuel, UBS: 2,225

Emanuel expects another 14% rise in the S&P 500. In his note with UBS, he explains his reasoning: “The S&P 500 has risen 200% since the bull market began in March 2009 — not unprecedented by historical standards. Buoyed by strong corporate balance sheets positioned to drive further M&A, the prospect of solid GDP anchoring steady earnings growth, and a Fed set to raise interest rates while mindful of incoming data, we expect the advancing tide to continue rolling. We forecast a 2015 year-end S&P 500 price of 2,225 on the back of earnings growth and modest multiple expansion, typical in a maturing rally.” He has a risk range of 1750 in the downside and 2400 on the upside. The downside risk projection stems from concerns over the health of Chinese and European economies, and his upside risk projection stems from household debt decreases and net worth increases providing “dry powder” for individual investors. In a phone interview with Bloomberg, Emanuel is quoted saying, “Given the fact that where we are at the point of the cycle and interest rates coming up from such an absolute low level, you can get multiple expansion that’s above and beyond.”

Brian Belski, BMO: 2,250

Belski sees 2015 as a year of moderate gains in a “stealth bull market” that could possibly make it to age 20. “Nonetheless, this has been a bull market whose underlying trend and proposed duration remains firmly doubted and distrusted by most of our clients, in our view,” Belski said in a recent note. “In other words, this is the largest stealth bull market of our collective careers, one that no one believes, and everyone is looking over their shoulder to diagnose its end.” He expects earnings growth of 8.6% on the year, with spikes in volatility that are “part of a normal corrective cleansing for any prolonged bull market.”

“Given the combination of improving economic conditions and rebounding earnings growth, we believe 2015 will represent another year of solid gains for US stocks.” “Our models suggest a year-end S&P 500 price target of 2,250 on EPS of $126.”

Among other things, Belski expects corporations to spend less on share buybacks and spend more on investing in their businesses, which is ramp up capital expenditures. In addition to investing for growth, companies need to replace their old stuff.

“[T]he average age of plant and equipment is at its highest levels in 50 and 15 years, respectively,” Belski wrote. “The way we see it is that there is a tremendous amount of pent-up investment spending demand and … we believe the next logical step for companies to improve growth prospects is to invest in their businesses.”

Dubravko Lakos-Bujas, J.P. Morgan: 2,250
Consumer spending will be more of a driver to GDP than in 2014 as the S&P 500 continues to climb the wall of worry, Lakos-Bujas notes. “We believe consumers are up to the higher task with the following drivers in place: (1) expanding employment and rising wages; (2) lower inflation imported from abroad (i.e., weaker China, weaker commodities); (3) stronger effect from recent wealth accumulation; and (4) rising confidence may result in expanding household leverage,” he said in a recent note.

S&P Capital IQ, Sam Stovall: 2,250
The current bull market is set to turn seven years old in March, well past the average age of bull markets, but Stovall said that history and fundamentals still point to a good year for stocks in 2015. While a market correction still looms, Stovall expects earnings-per-share to grow by 8.6% and points out that the second year after a big S&P 500 jump—as was the case in 2013—tends to still be pretty good. “Even though the start of a new rate-tightening cycle may serve as a cause for consternation next year, we believe a strengthening economy and solid underlying fundamentals support this projected price gain,” Stovall said in a recent note.

Adam Parker, Morgan Stanley: 2,275
“We head into 2015 bullish for the 3rd straight year,” Parker wrote in Morgan Stanley’s new 2015 Global Strategy Outlook report. “Our 12-month forward target for year-end 2015 is 2275, offering about 10% upside to today’s price, based on 7% earnings growth in 2015 and 2016 and modest further multiple expansion to near 17x forward earnings.”

Parker’s expectation for more multiple expansion (that is the ratio of stock price-to-earnings) flies in the face of the bears who warn the already elevated multiples will contract bringing stock prices down with them. Indeed, you could actually argue he’s going against his old self: after mis-forecasting the multiple back in 2012 he wrote, “Only the hubristic deign to project the market multiple.”

The core of our thesis is that we are in the middle of a long US expansion, one that may last until 2020. Economic factors like consumer confidence, financial obligations, and delinquencies are all improving and the consumer may be more insulated than investors think from a back-up in yields, given 75% of their financial obligations are in the form of a mortgage, close to 90% of all mortgages are 30-year fixed, and the average mortgage is termed out at the lowest rate ever.

Corporate behavior may also favor a long expansion. Capital spending remains constrained, inventory levels look under control, hiring remains muted, and M&A is still nascent. Furthermore, credit metrics generally look benign. Financial obligations have been pushed out several years, and the interest-bearing portion of today’s loans looks quite manageable given high interest coverage. Taking these factors into account, we generally think it pays to remain sanguine.

John Stoltzfus, Oppenheimer: 2311
“We expect the market to reach our target level on a combination of: sustained economic growth, corporate revenue and earnings growth (on the back of US expansion and process of international recovery), as well as further multiple expansion justified by the continued relative attractiveness of US equities on valuation, dividends and buy backs.”

Importantly, Stoltzfus believes that investors have yet to get excited about this market.

It’s not so much that the bull is tired or that the proverbial “Wall of Worry” has fallen away but that excepting the occasional bursts of excitement after pullbacks and announcements investors have proven to be more thoughtful about “what could go wrong” than in any bull market we’ve experienced in more than 31 years on Wall Street.

It’s no secret that “animal spirits” and “irrational exuberance” have been in measured if not short supply this bull market. We think that’s really a good thing and likely to carry stocks higher toward our target in 2015.

Stoltzfus likes cyclical stocks over defensive stocks in this environment. In particular, he recommends going overweight industrials materials, technology and consumer discretionary stocks.

Jonathan Golub, RBC: 2,325
“We are initiating our 2015 S&P 500 price target of 2,325, consistent with 12% potential upside,” Golub wrote in a note to clients on Friday. “This is based on a 16.7x multiple applied to our 2016 EPS estimate of $139.”

Golub believes 2015, as in 2014, will be highlighted by healthy US GDP growth, lackluster global growth with China and Japan getting worse, elevated profit margins, low volatility, and most multiple expansion, that is higher price/earnings (P/E) multiples. He said corporate revenues will track GDP higher. But earnings growth will pick up as companies clamp down on selling, general, and administrative (SG&A expenses).

“Going forward, we believe that SG&A will be the most important driver of margins as compensation grows at a slower pace than revenues. In our view, this should provide 1- 2% of upside per year,” Golub wrote.

Tom Lee, JP Morgan: 2,325

“I think stocks are going to do well in the end of this year, and I think people are going to start thinking about next year, and they’re going to want to be positioned,” said Lee, founder and strategist of Fundstrat Global Advisors. “They have various reasons to be optimistic about next year, everything from the gasoline dividend to QE taking place in Europe and Japan.”

Lee said a big story for the next year could be the reset of consumer balance sheets. He said now that seven years have passed since the first major wave of foreclosures, consumers who faced it could see their credit scores improve.

Lee said his top pick for 2015 is tech, and he also likes consumer discretionary and financials.

Tony Dwyer, Canaccord Genuity: 2,340
“We still have low and stable inflation. We have a Fed that is acting increasingly dovish over the weekend. We have a steep yield curve. Money availability is improving.” “This has all been a little bit overdone at this juncture. We see U.S. growth as becoming much more sustainable over the long term.” When oil prices collapse as they have this year, it generally leads to multiple expansion for stocks, he said. Also, pension fund managers have almost nowhere to go but U.S. stocks, considering how poorly international stocks and commodities have performed and how low yields are in fixed-income. The U.S. economy is growing, inflation is low and earnings are at record highs, he concluded.

Craig Johnson, Piper Jaffray: 2350
Here’s the investment thesis for the call laid out by market technician Johnson in a report titled Let the Good Times Roll: SPX 2,350 in 2015.  The current market environment looks most similar to the secular (or multiyear) breakout in the 1950s, suggesting more upside lies ahead. We suspect that low interest rates, low inflation and dovish (or market-friendly, stimulative) Fed policy will continue to underpin this equity bull market for the foreseeable future.

Given there are 25% fewer investable stocks today than there were in the early 2000s, we think the market is primed to go higher when asset allocation shifts toward equities; this should underpin this bull market for the foreseeable future. Investor skepticism toward this bull market remains high, and with $2.3 trillion still in money market funds, we believe there is ample dry powder still on the sidelines. Johnson says, “We believe the good times will continue to roll. We reiterate our 2014 year-end SPX price objective of 2,100, and establish our year-end 2015 price objective of 2,350.”

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2015 Year-End S&P 500 Projections

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