Even if everyone agrees that vaccines will ignite the economy next year, Wall Street’s collective consciousness has no idea what it will mean for stocks.
Forecasts among the people paid to fashion such estimates are all over the map — to an almost historic degree. The most bullish, Dubravko Lakos-Bujas at JPMorgan, predicts the return to normal will serve up a 20% rally, with the S&P 500 ending next year at 4,400. Less-optimistic ones, such as Citigroup’s Tobias Levkovich and Savita Subramanian at Bank of America, worry the gains are already priced in. They both forecast the benchmark will reach 3,800, or just a 3.7% advance.
The spread, which has precedent in other chaotic periods such as the years following the financial crisis, shows how hard it is to handicap a market when the economy is emerging from recession. Despite sinking corporate profits in 2020, everyone from hedge funds to retail investors has doubled down on stocks, encouraged by vaccine news and central bank stimulus. Up 63% from its bear-market low in March, the S&P 500 is trading at 22 times earnings, near the highest multiple since the dot-com era.
“We are in uncharted territory,” said Eric Diton, president and managing director of The Wealth Alliance. “Valuations are high and global interest rates are at lows we’ve never seen. A lot of the modeling economists will do doesn’t really work when we’re at extremes.”
Together, theaverage call of professional prognosticators is for the S&P 500 to reach 4,035 over the next 12 months, according to 17 estimates compiled by Bloomberg. As it stands now, the estimated gain of 10% is second-best since the last bull market began in 2009. As bullish as it sounds, the forecast is only slightly larger than the stock market’s average annual return over time of 9.5%. Indeed, not once in two decades has the consensus been for a down year.
“We’ve had a pretty significant appreciation and that’s making people feel optimistic,” said Giorgio Caputo, senior fund manager at J O Hambro Capital Management. “It seems like the gap is between flat to up a lot. Even though there is a gap, it doesn’t seem like the prognosticators are paying much attention to the risk of a drawdown. That’s always the environment in which you want to be careful.”
Barring a last-minute selloff, 2020 is poised to be another year when strategists missed big. Twelve months ago, they warned against betting on a repeat of a 2019 rally, citing event risks from the U.S. presidential election and a re-escalation of trade tensions. On average, they predicted the S&P 500 to finish 2020 at3,280. The index last closed at 3,663.46, 12% above expectations.
Of course, none had factored in the pandemic that plunged equities into a bear market before historic federal spending fueled an unprecedented rebound. During the past eight months, $18 trillion has been added to equity values and more stocks joined a rally that was initially dominated by software and internet stocks, companies that cater to the stay-at-home demand during lockdowns. From small caps to energy produces and airlines, firms that stand to benefit from a return to normal economic activity, have taken over leadership.
In the eyes of Lakos-Bujas at JPMorgan, the market is heading for a “nirvana” scenario where stocks will melt up broadly as the economy picks up speed. Levkovich at Citi disagrees, saying the rotation out of highly-valued technology stocks, the market’s biggest industry, is likely to hold back the S&P 500.
“The issue with the S&P 500 and expectations is that it’s not really a broad based index anymore,” said Bryce Doty, portfolio manager at Sit Fixed Income Advisors. “It’s two different indices — it’s tech and everything else. Only tech has soared to astronomical heights, the rest of the index hasn’t. So if the rest of the index has a nice rebound, where’s the money going to come from? Either it comes from cash on the sidelines or you have to sell something else like tech. You could see a massive rotation trade and the S&P is just flat.”
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