Analysis: High end of S&P 500 forecasts looks unlikely

By Edward Krudy and Ryan Vlastelica

NEW YORK (BestGrowthStock) – Some of the most prominent Wall Street forecasters have watched U.S. stocks (Read more about the stock market today. ) fall well short of their lofty expectations so far this year, but many are sticking to targets that imply a year-end gain of as much as 30 percent in the S&P 500 (.SPX: ).

The average forecast from 13 prominent firms for a 1,229 level on the S&P 500 Index still implies a 16 percent rally by the end of 2010. Of the five firms with the highest targets, one recently slashed its end-of-year expectations.

The lofty forecasts are looking less likely as equity markets languish, hurt by a fear the economy is going to fall back into recession. The S&P has dropped almost 14 percent from its high earlier this year and is down nearly 5 percent for 2010.

But David Bianco, chief U.S. equity strategist at Bank of America Merrill Lynch, is sticking to his guns. He said the market is currently pricing in a full-blown recession, which he thinks unlikely. He is sticking to his year-end S&P 500 target of 1,300, one of the highest on the Street.

“If you don’t think we’re going to fall into a significant recession before year-end, I think you should be buying,” said Bianco. “The earnings outlook needs to be slashed, just slashed in a huge way, for there not to be value in this market and for there not to be a big rally that at least gets us close to what my price target is.”

Bianco is estimating average earnings per share for the S&P 500 this year of $83. He said earnings and a prolonged spell of low interest rates should be enough of a tailwind to propel stocks higher but admits the market is having a hard time believing it.

“The economic data is certainly softening, but we’re just not sure yet it puts the earnings outlook in significant jeopardy,” he said. “We’re in this world where people find a 12 or so (price-per-earnings) multiple expensive, and yet that’s not historically expensive, and at these interest rates, it’s ridiculous.”


Birinyi Associates cut its year-end target to 1,225 from 1,325 earlier this week on an increasing likelihood the market will be stuck in a trading range as concerns about the economy offset good news from corporations.

Birinyi analyst Cleveland Rueckert said that there is too much negativity in the market at the moment for the positive fundamentals to shine through. He sees the current losses as a correction in a multi-year bull market.

“There is a negative attitude in the market right now,” Rueckert said, “but there remains a fairly resilient group of buyers, and at this point they don’t have to be aggressive.”

Rueckert also said forecasting the market is not the science it once was.

He says changes in market structure, such as the advent of electronic trading and the flow of volume away from the New York Stock Exchange to multiple trading venues, has made equity markets more opaque and made accurate forecasting harder.

“It’s gone from a relatively well organized marketplace (to) a very disorderly marketplace,” he said.

Binky Chada at Deutsche Bank has the highest S&P estimate on the Street at 1,375, which would imply a 30 percent rally through the end of the year.

In July Chada wrote that 120 points of S&P 500 gains would come from positive macroeconomic surprises, given the correlation of the S&P 500 and Deutsche Bank’s macro data surprise index. At the time the S&P 500 was trading at around 1,100, just over 4 percent above where it is now.

Much of the macroeconomic data in Deutsche Bank’s analysis in the meantime, such as retail sales and durable goods, have been disappointing. Chada was not available for comment.

Low volume and negative investor sentiment have plagued the stock market this summer.

The S&P 500 has been finding support around the 1,050 mark. Many technical analysts say stocks could be in for a rout if the market makes a sustained move below that. If investors decide, on the other hand, that the economy is not headed for recession, the market could surge.

“What has to happen is the market rallies in a huge way or we are just in recession, it’s that simple.” said Bianco. “Right now you need to believe we’re about to enter a full-blown, typical post-war recession.”

Analysts at Oppenheimer and JPMorgan, both with targets of 1,300, were not immediately available for comment.

(Editing by Padraic Cassidy)

Analysis: High end of S&P 500 forecasts looks unlikely