After the worst start to a year ever, the stock market surged to new highs in 2016.
All the major indexes rebounded to records and defied the doomsday forecasts that preceded events like Brexit and President-elect Donald Trump’s election.
For next year, no strategist at a top Wall Street firm forecasts that the bull market will end. Many expect America’s largest companies to return to earnings growth, and to see other benefits from Trump’s promises to cut taxes and ease regulations.
Near this time last year, the median year-end forecast for the benchmark S&P 500 index was 2,178 according to Bloomberg. On Thursday, December 8, the S&P 500 closed at 2,246.19, up 12% for the year, and higher than the forecast from the most bullish strategist, Fundstrat’s Tom Lee.
Here’s what some of the pros are saying about 2017:
2,300* — Bank of America Merrill Lynch
Comment: “2017 may be the least certain in years, with higher-than-usual risks and a binary set of outcomes that have dramatically contrasting results: euphoria or fizzle, significantly higher or lower than the base case,” said Savita Subramanian.
“As the likelihood of pro-growth policies waxes and wanes in the coming months, we see potential for big market swings. Risk/reward will be more important than absolute targets.”
*2017 could be a binary year where the market falls to 1600 in the bear case and 2700 in the bull case, Subramanian said.
Source: Bank of America Merrill Lynch
2,300* — Credit Suisse
Comment: “The key positive for 2017, in our judgment, is that investors are overweight deflation hedges (i.e. bonds) relative to inflation hedges (equities) at a time when policy makers are moving away from NIRP towards fiscal stimulus, and inflation expectations are set to continue rising,” said Andrew Garthwaite.
“However, we see a down market in H2 2017, hence our year-end 2017 target of 2,300. The second half challenges include the potential negative impact of US bond yields above 3% (3% being the CS view for end-2017); the growing pricing power of US labor squeezing profit margins; and the risk of China refocusing on reform rather than pro-growth policies. We continue to prefer equities to both bonds and gold.”
2,300 — UBS
Comment: “Despite the potential for more volatility, we expect the Bull to celebrate its 8th birthday in March 2017,” Julian Emanuel said.
“No recession is in sight, for now. However, the old saying ‘Three Steps and a Stumble’ could put stocks to the test when the Fed hikes again after a hike this December.”
2,300 — Goldman
Comment: “‘Hope’ is potential for positive EPS revisions from lower corporate taxes, repatriation of overseas cash, less regulation, and fiscal stimulus,” David Kostin said.
“‘Fear’ is risk that budget deficit limits tax reform, rising inflation prompts Fed to tighten steadily, and bond yields continue to rise.”
2,325 — Citi
Comment: “Our PULSE framework is neutral on 4 fronts (unanticipated, earnings, sentiment and liquidity), and is still positive on valuation,” said Tobias Levkovich.
“The normalized earnings yield gap analysis stands at 1.57 standard deviations below its 40-year average, yielding an 87% chance of higher markets in a year’s time… after essentially achieving our mid-2016 S&P 500 target of 2,100, we see possible late year softness given a year-end 2016 objective of 2,150… additional gains are reasonable in the next 12-15 months, but not outstanding; our mid-2017 target is 2,250 while our preliminary 2017 year-end target is 2,325.”
2,325 — Jefferies
Comment: “A regime shift occurred almost overnight following Trump’s victory,” Sean Darby said.
“Trumponomics: fiscal relaxation and protectionism are both inflationary and US dollar bullish. The unfolding of Trump’s policies will occur at a time when wages are increasing. Buy the consumer. Equities are benefiting from the unwinding of the momentum trade in fixed income and reach for yield, but a strong dollar will act as a ceiling for earnings and will tighten liquidity conditions.”
2,350 — BMO
Comment: “We believe the S&P 500 has a very good chance of delivering at least high-single-digit percentage gains in 2017 as the market transitions from P/E to EPS-driven gains and copes with the positives and negatives associated with a Trump administration and the changing policy dynamics it generates,” said Brian Belski.
“That being said, bouts of increased doubt and rhetoric are sure to generate consternation, with volatility representing a constant theme. However, the resiliency of US companies has proven itself time and time again throughout this bull market, and investors should avoid trying to time the market, in our view.”
2,350 — Deutsche Bank
Comment: “The S&P 500 should be 2250 by inauguration and 2300 upon a sizable corporate tax rate cut,” said David Bianco.
“The corporate tax rate is likely cut in the first 100 days and other proposed major corporate tax code changes deferred. The time in-between inauguration and tax cuts is risky; waiting for stimulus when rates and FX markets reflect such will cap stocks.”
2,400 — JPMorgan
Comment: “We think that, fundamentally, risks for equities in 2017 are likely to be higher compared to this year,” said Dubravko Lakos-Bujas.
“Prospects of pro-growth policy reforms under the new US administration are main sources of upside risk to our targets, but both the passage and efficacy of these measures are far from certain at this moment. Stronger USD and higher rates are main sources of downside risk for corporate earnings and the equity multiple, especially if those trends are not supported by stronger growth expectations.