A Tumultuous Year Ahead

Wall Street’s S&P 500 Year-end Forecasts:

  • Federated Investors: 2350
  • RBC: 2325
  • Morgan Stanley: 2275
  • J.P Morgan: 2250
  • BTIG: 2200
  • Blackrock: 2160
  • Barclays: 2100
  • Goldman Sachs: 2100

Wall street firms polled by Birinyi Associates see the S&P 500 rising an average 8.2% this year as accelerating economic expansion and corporate earnings growth outweigh the detrimental effects from increasing rates. This comes after the S&P 500’s 11.4% gain and 53 record highs last year, extending the US bull market toward its 6th year anniversary this March.

Not one firm polled sees equities declining despite the Fed’s warnings of increasing volatility as they normalize rates. The Fed’s proclamation has already come true with VIX averaging 19.3 so far this year compared to last year’s average of 14.3. Despite higher volatility, stocks so far remain flat.

Studies show that stocks can continue to climb during the early stages of a tightening cycle (WSJ). Ben Carlson provides more detail in his Wealth & Common Sense blog, revealing that out of the 14 tightening cycles since 1950, in only 2 instances stocks lost value (bonds lost value half of these times). Furthermore in no instance was the rest of the globe embarking on massive QE while the US was normalizing rates, a situation that will offset any Fed effect (other than a strong dollar).

The dollar will continue to rally, fueled by the widening monetary divergence between the US and the rest of the world. Nevertheless any currency pressure on exports (13% of GDP) will be offset by low interest rates and oil prices. Depressed by an influx of foreign capital from the ECB ($68 billion/ month QE starting March) and BOJ ($60 billion/ month QE), lower interest rates will help US consumers (71% of GDP) in the form of lower borrowing rates, and corporation in the form of higher margins.

While the Fed has fixated on a June rate increase, international demand for higher yielding US assets will dampen the effect of the Fed’s rate hikes, holding interest rates low while boosting stock higher. TIC flow data (November: +$53.5 billion) already showed a record $6.112 trillion in Treasury bond held by foreign investors. Their insatiable demand will nearly create a bubble in US assets as long as their central banks keep printing money.

Equities are already pricey with the S&P 500 trading at 16.3 times forecasted earnings at the end of 2014 versus a historical average of 13.9 (WSJ & Factset). Similarly the index trades at 1.7x its expected sales this year, 31% higher than its 10-year average of 1.3. Nevertheless stocks will find momentum in earnings growth, forecasted at +6.3% for the full year which would be the best yearly performance since 2011 (WSJ).

Already pricey US assets temper Goldman Sachs PWM’s forecast to a 4.7% to 8.4% gain for the S&P 500 this year. Instead they recommend 2 foreign markets: Japan and Spain. Similarly Blackrock suggests cheaper Asian stocks like China and Japan (beware China’s margin levels).

Unfortunately strong economics correlates into stock performance worse than rainfall (Vanguard). While the US is a positive outlier economically, Barons reminds us of “the much heralded initial jobless claims numbers that hit a 14-year low last fall. That number also hit lows in June 1987, March 2000, and June 2007, which were all close to major market highs.” Beware for a precipitous decline in US stocks once the rest of the world stops printing money.

One thought on “A Tumultuous Year Ahead

  1. Strategists have already lowered their Euro forecasts:

    Morgan Stanley: $1.05 from $1.12
    BofA: $1.10 from $1.20
    HSBC: $1.09 from $1.15

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