Biggest Stock Bulls Cut S&P 500 Estimates as Earnings Near

  • Weeden's Purves chops outlook 13%, citing profits and economy
  • Deutsche Bank, Bank of America also rein in enthusiasm

More of Wall Street’s typically optimistic equity forecasters are capitulating, including one of the most bullish.

Michael Purves, the chief global strategist at Weeden & Co. whose year-end forecast for the Standard & Poor’s 500 had been the highest among 21 firms tracked by Bloomberg, lowered his outlook by 13 percent. Deutsche Bank AG and Bank of America Corp. also reined in their enthusiasm.

Strategist forecast the S&P to climb to 2,142
Strategist forecast the S&P to climb to 2,142

Subdued growth in corporate earnings and unsettled economies in China and other emerging markets will confine the benchmark gauge to 2,050 at most this year, Purves wrote in a note to clients on Monday. That’s down from his old target of 2,350.

“The longer term case is still there, but you have to be realistic that there’s a real risk that global growth slows down,” Purves said in a phone interview. “I’m not saying that we’re going into a longer-term sideways market or bear market. Right now, we need questions answered.”

After the S&P 500 plunged 10 percent in four days in August for the first correction since 2011, 12 of the 21 strategists surveyed by Bloomberg cut their year-end forecasts. The average prediction has dropped 4.1 percent to 2,142 since Aug. 10.

To get to analysts’ average estimate, the S&P 500 would have to rally more than 8 percent between now and the end of the year. Such an advance during that period wouldn’t be a far cry from the average 6.4 percent rally that occurred over that stretch since 2009.

Bullish Framework

Further rallying in stocks is contingent on the resolution of unknowns in the market, including the efficacy of monetary policy in China and inflation in the U.S., according to Purves. Scarce inflation is “leaning heavily” on revenue in the S&P 500 and hurting earnings growth prospects, he wrote.

“The market just needs the world to be OK to push into a strong bullish framework,” Purves said in the interview. “If China data starts looking decent and they managed the slowdown in a real, sincere way, you can expect that this is nothing other than a pause.”

David Bianco, chief strategist at Deutsche Bank, cut his year-end target to 2,050 from 2,100 after Friday’s weaker-than-forecast labor report. The slowdown in jobs growth bodes poorly for the odds of a Federal Reserve interest-rate increase, which brings more uncertainty to the market, he wrote in a note Oct. 2.

“This reduces upside for stocks. It means rates, currency, commodity and PE uncertainty continues,” Bianco wrote. “Rates will be low in 2016, but where overnight rates will be in 2017 is now more uncertain.”

Bank of America’s Savita Subramanian also joined the souring sentiment, lowering her year-end target to 2,000 from 2,100, citing a cloudy outlook for growth. The prediction would represent a 3 percent drop in the S&P 500 for the year, after three years of double-digit growth. Bank of America is tied with Goldman Sachs Group Inc. for the second-lowest estimate, after Jefferies Group LLC’s 1,900 forecast.

Investors will get a first glimpse of U.S. corporate profits this week, as Alcoa Inc. reports Thursday after the market closes. Analysts predict third-quarter earnings for S&P 500 companies contracted 6.9 percent, the largest quarterly drop since 2009, based on data compiled by Bloomberg. For the year, earnings are estimated to slip 0.1 percent.

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