The first three Wall Street strategists to make forecasts for 2013 agree that the Standard & Poor’s 500 Index will reach an all-time high following five years without a record.
Bank of America Corp.’s Savita Subramanian yesterday joined Citigroup Inc.’s Tobias Levkovich and Bank of Montreal’s Brian Belski in predicting the benchmark gauge for U.S. stocks will top the high of 1,565.15 set on Oct. 9, 2007. The rest of the 15 strategist Bloomberg tracks have yet to make a 2013 estimate.
While the Federal Reserve’s plan to buy mortgage securities helped extend the S&P 500’s 2012 rally to 17 percent this week, bulls are pointing to more than just a third round of quantitative easing as reasons to buy stocks. Subramanian cited forecasts for record earnings next year, reduced concerns about risks to the global economy and an abundance of bearishness on Wall Street that’s bound to change.
“Investors are feeling a little bit calmer,” Abby Joseph Cohen, senior U.S. investment strategist at Goldman Sachs Group Inc, said in a Sept. 13 interview with Trish Regan and Adam Johnson on Bloomberg Television’s “Street Smart.” “It’s important to distinguish between the underlying fundamentals and that other key element of risk and fear. One thing that has been happening is investors risk tolerance is improving somewhat. It’s still not back to normal.”
The S&P 500 has surged 117 percent since March 9, 2009, after companies in the index posted 11 quarters of earnings expansion. Stocks were also boosted as the Fed took unprecedented measures to stimulate the U.S. economy. Retailers, restaurants and financial firms have led the gains. The index rose 1.9 percent this week to 1,465.77, the highest level since December 2007.
Strategists estimate earnings will keep rising next year to a record $106.68 a share for the S&P 500. All but one of the 12 estimates compiled by Bloomberg are higher than $100 a share. Subramanian’s 2013 forecast of 1,600 represents a 9.2 percent advance from yesterday’s closing level. The prediction compares with Belski’s 1,575 and Levkovich’s 1,615.
Stocks climbed this week as the Fed said it was committed to buying bonds until the U.S. labor market recovers “substantially.” The central bank said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month.
The Fed introduced two previous rounds of bond purchases totaling $2.3 trillion in an attempt to revive the economy and boost asset prices. It has held the main interest rate close to zero since December 2008 and said this week it would probably keep it that low through mid-2015.
“People like the idea of a Fed put, the idea the Fed will stand behind the economy and step in to intervene,” said Charles Bobrinskoy, director of research at Ariel Investments in Chicago, speaking on Bloomberg Television’s “Market Makers” yesterday.
Subramanian said that the rally wouldn’t be a “straight line up.” The S&P 500 fell as much as 19.4 percent from April to October last year, putting the benchmark gauge for American equity on the brink of a bear market after S&P cut the U.S.’s AAA credit rating. The S&P 500 surpassed her 2012 estimate for 1,450 on Sept. 13, the day of the Fed’s announcement.
“Economic growth could disappoint in the second half and early next year, as uncertainty weighs on business and consumer spending in anticipation of the fiscal cliff,” Subramanian wrote, referring to $600 billion in tax increases and spending cuts that may go into effect if Congress fails to act. “This could add to the drag on growth from the recession in Europe and decelerating trends in emerging markets.”
Baring Asset Management Inc.’s Hayes Miller says equity gains have gone too far too fast. Stocks will fall as investors realize profit margins have peaked and the Fed’s stimulus has driven most of the rally, he said.
“QE3 is another dose of artificial stimulation that kicks the can further down the road,” Miller, the Boston-based head of asset allocation in North America at Baring, which oversees $47.5 billion, said in a phone interview. “We still have to work through excess debt that needs to be restructured, we still have to work through the fiscal cliff, we still have to work through the fact that we have been on peak profits.”
The rally has not brought individual investors back to equities. Mutual funds that buy U.S. stocks have posted net outflows for a fifth year through 2011, the longest streak in data going back to 1984, according to the Investment Company Institute in Washington. Withdrawals have exceeded $80 billion this year, ICI data show.
“There are a lot of investors with too much cash on the sidelines who are capitulating and moving into the market,” Andrew Slimmon, Chicago-based managing director of global investment solutions at Morgan Stanley Smith Barney, said in a telephone interview. His firm has $1.7 trillion in client assets. “We’ve gotten an awfully good move, and it’s caught a lot of investors way too cautious in a very strong year.”