• Delphi's Black isn't optimistic about U.S. equities in 2016
  • Outlooks range from modest stock gains to a down year

Weaker-than-expected market conditions will keep the Federal Reserve from raising rates as much as predicted in 2016 as company earnings and the global economy will remain strained, Wall Street strategists told Barron’s.

Tumbling commodity prices and economic sluggishness will continue to limit profit growth, according to many of the nine strategists participating in Barron’s 2016 Roundtable panel discussion in the magazine’s Jan. 18 issue. Respondents see flat to modest gains for U.S. equities ahead as slow U.S. expansion won’t be enough to shake the headwinds from global economic turmoil and the fall in energy prices.

Crude oil’s plunge has fueled a flight from risky assets around the world amid mounting concern that China’s policy interventions won’t revitalize growth. At the same time, the Fed is tightening monetary policy. Two weeks into 2016, the Standard & Poor’s 500 Index has dropped 8 percent, falling for a third straight week to the lowest close since August. The index is off to its worst annual start on record.

In December, Fed Chair Janet Yellen and her colleagues on the Federal Open Market Committee elected to raise the benchmark federal funds rate from near zero, where it had been held since December 2008. The median committee member projected the central bank would raise interest rates four times in 2016, according to materials released following the meeting.

Divergence

Jeffrey Gundlach, founder and chief executive officer of DoubleLine Capital, told Barron’s the Fed may be forced to ease again after lifting rates one more time, given the uncertainty in the economy. Investors shouldn’t ignore the divergence between junk bonds and the S&P 500 Index, which is pointing to a bear market, he said.

Jeffrey Gundlach
Jeffrey Gundlach
Photographer: Patrick T. Fallon/Bloomberg

Scott Black, founder and president of Delphi Management, isn’t optimistic about U.S. stocks’ performance in 2016, either. In fact, equities may be slightly overvalued, he told Barron’s. Even though the labor market continues to recover, earnings momentum has slowed and domestic industrial production has waned. It’s a stock picker’s market, he said, because it’s getting harder to find great value in individual issues and the market as a whole.

Stronger Dollar

Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s Global Markets Institute, sees U.S. growth and an appreciating currency could attract capital flows into the U.S., possibly pushing price-earnings ratios higher than people expect. Her firm has a year-end price target of 2100 on the S&P 500.

Despite the challenges, all is not lost, said Mario Gabelli, chairman and CEO of Gamco Investors. The U.S. economy will grow by 2 percent this year, Gabelli said, powered chiefly by a stronger consumer. Stock and energy prices will look stronger heading into 2017.

Brian Rogers, chairman of T. Rowe Price Group Inc., offered recommendations on “a handful of companies with staying power,” including American Express Co., Comcast Corp., Eaton Corp., Macy’s Inc., Occidental Petroleum Corp. and Qualcomm Inc.

Oscar Schafer, chairman of Rivulet Capital, recommended smaller-capitalization stocks including Evertec Inc., Calpine Corp., CommScope Holding Co. and NICE-Systems Ltd.

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