Citigroup Unbowed Bull on U.S. Stocks as Other Strategists Sourby
Levkovich Says China, commodities damage already in prices
Nine of 21 analysts cut 2015 forecast, new average is 2,171
As more strategists trim their upbeat outlook for U.S. stocks, Citigroup Inc. is defending its bullish stance.
Citi’s Tobias Levkovich held steadfast to a 2,200 year-end price target for the Standard & Poor’s 500 Index. That’s 3.2 percent above the May record and 17 percent higher than yesterday’s close. After the gauge plunged 10 percent in four days in August for the first correction since 2011, nine of the 21 strategists surveyed by Bloomberg have cut their year-end forecasts. The average prediction has dropped 2.8 percent to 2,171 since August 10.
Cutting price targets after a plunge in the market may be reactionary, rather than forward looking, Levkovich said. His thesis: China’s effect on U.S company earnings will be limited, the damage to commodities companies has been done, and credit conditions are adequate.
“What bothers me is the inconsistency of the arguments -- arguments meant to fit the moment rather than a disciplined process for determining the outcome,” Levkovich said by phone Wednesday. “Three months is a lot of time. If you think about how sharply the market corrected, I think it’s a little premature to be forced to change my view.”
The S&P 500 added 1.5 percent to 1,913.14 at 2:56 p.m. in New York, trimming its quarterly retreat to 7.3 percent.
Levkovich pointed to attractive valuations and historically low sentiment as bullish signals. The S&P 500’s price-earnings ratio contracted 7.8 percent from the second quarter to 16.9 -- the first decline since the same period in 2014. That could represent an attractive point for investors to jump in and buy the dip, he said.
Meanwhile, investor confidence weakened after the devaluation of the yuan and, more recently, the selloff in biotechnology companies. Yet sour sentiment sets a low bar for positive market reactions. There’s a 95 percent probability that the S&P 500 will be higher in 12 months, according to Citigroup’s model based on sentiment measures.
Sentiment may be even lower than most models indicate, Tom Lee, managing partner and co-founder of Fundstrat Global Advisors LLC, wrote in a note Wednesday, citing an investor meeting earlier in the week. Lee’s year-end target of 2,325 is one of the highest among those surveyed by Bloomberg.
Other strategists point to the slowdown of the world’s second-largest economy as a reason to ditch the optimism. Goldman Sachs Group Inc. slashed its year-end view to 2,000 Tuesday due to China woes and lower-than-expected oil prices, in what would be the first negative returns for the benchmark since 2011.
Earnings for companies in the S&P 500 are expected to contract 6.5 percent this quarter, followed by a 1.2 percent decline in the fourth, according to the average estimate of equity analysts in a Bloomberg survey. Yet by Levkovich’s measure, earnings could grow as much as 6 percent by the year-end, thanks to easier comparisons with last year.
“In the second quarter you had people taking their estimates down, but earnings were flat,” Levkovich said. “I think we could get some upside surprise this quarter. The market is volatile, and volatility goes in both ways.”