Stock Strategists' Optimism Dims as Wells Fargo Cuts Estimates

  • Wells Fargo's Martin Adams cuts 12-month estimate to 2,100
  • Nine analysts have cut their projections for stocks in 2016

Add Wells Fargo Securities LLC to the list of equity forecasters reining in optimism as losses mount in U.S. stocks.

Gina Martin Adams, equity strategist at the world’s largest bank by market value, lowered her target for the Standard & Poor’s 500 Index by 6.5 percent. Tumbling oil prices, tighter credit conditions and a flatter yield curve spurred Martin Adams to lower her forecast for the benchmark in the next 12 months to 2,100, down from a previous call of 2,245. Her projection still implies about a 9 percent jump from the benchmark’s current level of 1,930.

“Stocks will move higher over the next 12 months, but perhaps not as robustly as we forecast in early December,” Martin Adams wrote in a research note to clients Thursday. “There is likely also a lid on multiples given deteriorating credit quality. It will thus likely be largely up to the earnings recovery to drive the index price higher.”

In 2016, nine of 22 strategists tracked by Bloomberg have already lowered projections for the S&P 500. Everything from China to oil and interest rates has caused their confidence to fade, as more than $2 trillion was wiped from U.S. stocks. The average analyst estimate decreased in early February, the first time that’s happened that early in a year since the Iraq war in 2003.

The median forecast for 2016 by strategists at the end of last year was 2,200. It’s since fallen to 2,175, or 13 percent higher than the S&P 500’s close on Wednesday. The index climbed 0.2 percent to 1,933.68 at 10:46 a.m. New York time.

Martin Adams joins some of the biggest bulls who have cut year-end targets, including Canaccord Genuity Inc.’s Tony Dwyer and JPMorgan Chase & Co.’s Dubravko Lakos-Bujas, who cited the potentially negative effect of heightened market volatility on the economy and earnings.

Bank of America Corp.’s Savita Subramanian earlier this month cut her estimate by 9 percent to 2,000, making her tied with JPMorgan as the most bearish strategists in the Bloomberg survey. She cited a “dearth of liquidity” in financial markets that is heightening volatility.

“Credit sensitivity is starting to emerge and leverage is going from being OK and not being a threat to being evil again,” Subramanian said Wednesday on Bloomberg Television. “Companies aren’t as optimistic and are actually more pessimistic of their own prospects.”

One bright spot in Martin Adams’ forecast: consumer discretionary stocks. As wages continue to grow and consumer confidence remains intact, the sector’s profit will jump 15 percent. That’s higher than the 12 percent growth bottom-up stock analysts are seeing, Martin Adams wrote.

Still, returns from the S&P 500 will continue to be crimped by the “usual commodity-sensitive suspects,” she said. That pushed her to trim her estimate for earnings in 2016 to $121 a share from $129. Investors should be positioned for slow growth as groups like energy, materials, industrials and financials weigh on the market, she said.

“Damage to risk appetite is evident, and breaking the addiction to policy support remains a challenge,” Martin Adams said.

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