At the start of each year, the chief strategists at
firms analyze dozens of variables and make bold prognostications
for the year ahead. They distill all of their conclusions into one
simple number -- the S&P 500, and where it will reside one year
As these strategists were putting their forecasts together, they
surely noted that the S&P 500 was marching nicely higher.
Trouble is, it keeps moving up and is starting to already breach
the more conservative forecasters on the Street.
More than a few of these folks predicted the S&P 500 would end
the year around 1,325. We've already surpassed that mark, and we've
got 11 months to go! To be sure, other folks see a brighter finish.
Here's a small sample of key
strategists, along with their year-end forecasts for the S&P
Wells Fargo (NYSE:
December 2012 S&P 500 target: 1,325
This forecast was issued in early December 2011, and has already
gotten one factor wrong. "Stocks seem destined to start the year
troubled by ongoing
struggles in Europe, waiting for another jolt from policymakers,"
was their off-the-mark prediction. To be fair, many investors had
been waiting for another shoe to drop from Europe. And who knows,
it still may happen.
Meanwhile, that cautious backdrop has possibly helped, as stocks
have "climbed a wall of worry." In effect, most rallies only come
when a group of investors takes a
view and stocks get underpriced as those worries filter in. Worries
about Europe have receded, which counter-intuitively, is a bearish
sign because there is no wall to climb.
How did Wells Fargo arrive at that 1,325 S&P 500 target? They
expected aggregated profits for all 500 companies in the
would rise 4% this year, and suggested that an environment of low
and low rates warranted a target P/E of 13 times
Wells Fargo's strategists say much will hinge on how Washington
responds to the current budget problems. "The uncertain outlook for
fiscal policy seems likely to continue to dampen confidence and
create uncertainty for investors. In our view, the first concerted
effort to cut the path of U.S. fiscal spending will be greeted with
a sigh of relief," they note.
Curiously, as the battle for the Republican Party's Presidential
nomination unfolds, budget pressures have fallen from the headlines
-- and investor's consciousness. How long will that last?
Goldman Sachs (NYSE:
December 2012 S&P 500 target: 1,250
This is a sobering forecast, implying the market has peaked and
will actually head lower. Based on all of the global headwinds in
place, Goldman's strategists say a price-to-earnings (P/E) ratio of
around 11.8 times 2012 profits is the right multiple. And they
derive that forecast with the assumption that the United States has
tepid economic growth and Europe slips into a mild
. But they caution that "in the event of a harsher global recession
scenario we forecast far more significant downside."
How does 900 for the S&P 500 sound? Not good. That's where
Goldman says the S&P 500 will end up in a worst-case scenario.
December 2012 S&P 500 target: 1,350
This is another cautionary
. Merrill actually predicted stocks would start the year on a solid
note, but suggested investors shouldn't get complacent. "In the
short term, we expect the New Year rally in risk assets to
continue." Although analysts acknowledge that the still-unresolved
European crisis may be seen as a drag, they still thought it
prudent to "swim against the tide early in 2012 by betting on
upside rather than downside, driven by bearish investor positioning
and U.S. growth upgrades. A grind higher in stock prices remains
plausible but we recommend taking profits if equity markets move
toward our year-end targets of 1350 for the S&P 500."
December 2012 S&P 500 target: 1,325
Seeing a pattern emerge? This is another outlook that would suggest
it's already time for profit-taking, predicting "2012 should again
be a struggle between stronger domestic fundamentals and macro
risks." Clearly, such macro risks aren't in evidence right now.
Indeed, as of the very latest snapshot, it appears that Greece will
strike a deal with creditors and avoid (or at least forestall)
The UBS forecasters raise another concern, and I am in complete
agreement on this one. They predict "equities will struggle in the
face of the European recession currently being forecast by UBS
While I am churlishly piling on these strategists for their
cautious stance, I too have been a bit wary of this rally. I still
think that European recessions, and not the
crisis, hold the real threat to profits and stocks.
After watching the S&P 500 run from 1,160 in late November to
1,280 in mid-January,
I grew nervous
about what Europe will look like AFTER the debt/currency crisis is
addressed. Addressing the weakest countries, I suggested that "it's
hard to see how these lagging economies can avoid an even deeper
economic retrenchment -- one which makes it hard to make a dent in
debt burdens. And if that's the case, then continent-wide economic
expansion will also grind lower."
Well, the S&P 500 has risen another 2% since then. That's
likely attributable to continuing positive economic signs. Just
this past week, we saw
reports on jobs, manufacturing and construction spending. Then
again, fourth-quarter earnings have just been OK, and have not
delivered the stellar upside we'd seen in recent quarters. For this
rally to sustain throughout the year, quarterly profits -- and the
-- will need to keep getting healthier.
Action to Take -->
If you own any recent big gainers, then no one could blame you for
taking profits. Short rallies should always be seen as an
opportunity to raise cash so you have the funds to invest the next
time the market pulls back.
If you haven't heard about this unique opportunity, then I want to
tell you about it now. StreetAuthority has staked me with $100,000
of real money to invest in my absolute best ideas. For a limited
time, you'll be able to follow along with me completely free.
Go here to learn more
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of FWF in one or more if its "real money" portfolios.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.