By Wallace Witkowski, MarketWatch
Although Trump corporate tax-cut seen as a turbocharge to targets
With less than a week to go before the trading books are closed for 2016, the S&P 500 index is pushing toward the more bullish targets set a year ago following a rocky ride.
Stocks finished higher Friday (http://www.marketwatch.com/story/us-stock-futures-point-to-holiday-induced-slumber-but-banks-may-be-on-the-move-2016-12-23) with the Dow Jones Industrial Average up just over 14% for the year, and the Nasdaq Composite Index up 9%. The S&P 500 index , which most strategists target for their year-ahead projections, has risen nearly 11%, finishing Friday at 2,263.79, less than 8 points below its closing record.
Barring a selloff in theweek between Christmas and New Year's, the S&P 500 is looking to close out 2016 about 3% higher than the average original target of strategists polled a year ago.
Going forward, strategists agree upon a few things, but their S&P 500 targets for 2017 differ by 200 points. That raises a question: With the rally in stocks since the surprise election of Donald Trump as the nation's next president, does the S&P 500 rise 1.7% or gain 10.6% in 2017?
Firm / Strategist 2017 target Original 2016 target
Goldman Sachs (Kostin) 2,300 2,100
B. of A. Merrill (Subramanian) 2,300 2,200
Morgan Stanley (Parker) 2,300 2,175
Credit Suisse (Garthwaite) 2,300 2,150
Citigroup (Levkovich) 2,325 2,200
S&P CFRA (Stovall) 2,335 2,250
Deutsche Bank (Bianco) 2,350 2,200
BMO Capital (Belski)2,350 2,100
J.P. Morgan (Lakos-Bujas) 2,400 2,200
Barclays (Glionna) 2,400 2,200
Oppenheimer (Stoltzfus) 2,450 2,300
RBC (Golub) 2,500 2,225
Average 2,359 2,192
Strategists across the board can agree that hope is a huge factor going into 2017 in the form of proposed deregulation and a cut to the corporate tax rate promised by Trump, which acts as a turbocharging factor to many targets depending on the extent of the cut.
Also, given those factors, and Trump's ability to move markets with a tweet, expect volatility to roar back onto the scene in 2017. The CBOE Volatility Index is currently at its lowest levels of the year, ending Friday at below 12.
Read:Warning: Wall Street can't predict where the S&P 500 will go in 2017 (http://www.marketwatch.com/story/warning-wall-street-cant-predict-where-the-sp-500-will-go-in-2017-2016-12-06)
At current S&P 500 levels, the closest predictions for the S&P 500 in 2016 go to Sam Stovall, chief investment strategist at S&P Global, and John Stoltzfus, chief investment strategist at Oppenheimer, who had original -- and relatively bullish -- 2016 targets of 2,250 and 2,300, respectively.
In 2017, Stoltzfus, with an S&P 500 target of 2,450, expects the economy to keep expanding in the U.S. and recover modestly abroad even despite geopolitical and populist headwinds.
"Our expectations are for tailwinds for the equity market stateside as elements of the stimulative fiscal agenda broadly outlined by President-elect Donald Trump are implemented," Stoltzfus said in a recent note. "That said, we believe that the effects of the stimulus agenda are not likely to be felt in the economy until such fiscal policies are enacted and are given some time to take effect."
S&P's Stovall, with a 2,335 target, notes that each of the 10 Republican presidents since Theodore Roosevelt had a recession in their first term. With that, Stovall pins his hopes on modest GDP growth in 2017 as well as single-digit stock appreciation given the recovery from 2016's earnings recession.
"However, if we are wrong, we think we are most likely underestimating the year's potential growth in GDP, [earnings-per-share] and price-appreciation potential as a result of the favorable impact on consumer and investor confidence," Stovall said in a note.
With that, here are how other strategists are supporting their 2017 targets for the S&P 500:
David Kostin, Goldman Sachs (2,300): Kostin expects the rally to continue in the short term, with corporate tax reform and infrastructure spending instilling hope, and then a fall off in the second half of the year.
"The prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions," Kostin said in a note.
Fear will filter back into the market when the focus will return to rising inflation and interest rates, he said.
Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch (2,300): Accelerating U.S. and global GDP growth with higher oil prices should drive a pickup in earnings growth, Subramanian said. There is, however, a wide variation on how the market will react to the execution of policies promised on the campaign trail, which widens the range of Subramanian's target to a 1,600 bear case and a 2,700 bull case.
"Whether we enter a recession in 2017 or not, if policy makers cannot deliver a pickup in growth next year, growth is very likely to disappoint markets," Subramanian said.
"In the coming months, we will be closely monitoring (1) president-elect Trump's comments on trade, (2) House GOP members' comments on deficits and spending, and (3) credit conditions worsening or improving," she noted.
Andrew Garthwaite, Credit Suisse (2,300): Garthwaite expects rising economic momentum, earnings, excess liquidity, and a reasonably elevated risk premium in stock to carry the S&P 500 to about 2,350 by midyear. After that, he sees a pullback should Treasury yields top 3% -- the current 10-year Treasury yield is at 2.54% and has been rising sharply since the November election -- with other headwinds coming from wages squeezing profit margins and China refocusing on reform rather than pro-growth policies, resulting in his 2,300 year-end target.
Adam Parker, Morgan Stanley (2,300): While the market may be faster and looser in 2017, Parker believes that higher growth and equity inflows will help offset some of that volatility.
"Higher odds of looser U.S. fiscal policy raise the likelihood of better growth and a more rapid end to the cycle," Parker said in a recent note. "This view leads us to sell credit to buy equities, and position for higher volatility in equities, credit and rates."
Tobias Levkovich, Citigroup: (2,325): A "consolidation breather" should come in the short term given the market's run since the election, Levkovich said. Markets appear to be less panicky now and correlations between stocks have dropped, he said.
"In the past, such low levels of correlation suggested that fund managers had become too complacent by only trading stocks on their idiosyncratic factors," Levkovich noted, adding that investors may have "borrowed" some of 2017's gains already.
Still, there is always the factor of Trump's proposed corporate tax cuts which could add another 100 points to his target, he said.
Brian Belski, chief investment strategist at BMO Capital (2,350): Belski believes the "wall of worry" that the stock market has climbed over the past eight years "applies to President-elect Trump as well, perhaps figuratively and literally."
Expect a steady climb, with many bumps in between, Belski said. Risk premiums are largely static and earnings growth remains optimistic. The big variable remains debate over policy going forward, which could created periods of higher volatility as that plays out.
David Bianco, Deutsche Bank strategist (2,350): One of the biggest drivers for stocks will be how much U.S. corporate tax rates are cut under Trump, given that each 5 point cut in the corporate tax rate from 35% would boost S&P 500 EPS by $5, Bianco said. Given that, a cut to 25% would boost EPS by $10, supporting a rally up to 2,400 by the end of the year.
Jonathan Glionna, U.S. equity strategist at Barclays (2,400): Glionna expects earnings to push the market higher with forward price-to-earnings ratios to remain elevated at about 17x on the basis that multiples tend not to expand further this late in a business cycle. That's a base case however, Glionna sees a S&P 500 of 2,500 should EPS growth get an added boost from tax measures from Trump and Republican control of Congress. On the other hand, the S&P 500 could drop to 2,000 without a recession should a stronger dollar and interest rates tighten financial conditions.
Dubravko Lakos-Bujas, J.P. Morgan (2,400): With Lakos-Bujas, the uncertainty remains how Trump will balance his policies with his rhetoric.
"It is difficult to overstate just how wide the range of possible policy outcomes is currently. While majority of President-elect Trump's policies are pro-growth for equities, parts of his more populist rhetoric could significantly disrupt the economy (e.g. imposing punitive import tariffs on our largest trading partners or withdrawing from established trade deals)," Lakos-Bujas noted.
Other than that, the biggest downside he sees are a stronger U.S. dollar and higher interest rates, which couldharm earnings if they are not supported by stronger growth, he said.
Jonathan Golub, chief equity strategists at RBC Capital Markets (2,500): Topping out the highest base case target of those surveyed, Golub said the election of Trump carries with it the "biggest paradigm shift since Reagan."
Elements of that paradigm shift include a stage set for reflation with unemployment below 5% and steady job growth as well as corporate tax cuts adding 5% to 7% to earnings going forward. Add to that deregulation, which would increase economic growth through productivity gains and boost the financial sector, and improved consumer spending as wages rise.
(END) Dow Jones Newswires
December 26, 2016 10:31 ET (15:31 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.