Strategists still betting on fourth-quarter US stocks rebound

30 Sep 2015 | Author: | No comments yet »

Goldman Sachs slashes S&P 500 price target, sees negative return for U.S. stocks.

Wall Street is becoming more negative on stocks though many strategists still expect a seasonal rally that will take the S&P 500 to a gain for the year. But the index is currently down more than 8 percent year to date, and the track record for digging out of a third-quarter slide is not good. “I’m less confident in this market than I’ve been in a long time.

It doesn’t mean I’m in the bear camp,” said Randy Frederick, managing director, trading and derivatives at Charles Schwab. “We could be in for more of this yuck until December. The forecasts for the end of the year have been falling in recent weeks as U.S. stocks entered correction territory and fears mounted about global growth, continued low oil prices, an elevated U.S. dollar and declining corporate earnings. Goldman’s proprietary metrics suggest the Chinese economy is growing by roughly a full percentage point slower than the official data indicate, and the team downgraded its forecasts for U.S. and global growth in 2016. Monday Goldman said slower economic growth in the U.S. and China and a lower oil price than the bank previously anticipated were reasons it took its target from 2100 to 2000. The index enters the last day of the third quarter with a quarterly loss of 8.6 percent. “I was thinking we could see high single-digit gains this year, but I’m now in the boat where we’ll be fortunate if we get back to unchanged,” Frederick said.

Kostin alo notes that the political backdrop in Washington is as unstable as ever, with the resignation of John Boehner potentially setting the stage for another protracted showdown over raising the debt ceiling. For RBC strategist Jonathan Golub, it was the recent market selloff and “weaker corporate results” that prompted him to downwardly revise his view. But we were starting way down in value and now we were just a few points from the all-time high,” said Frederick. “I was hoping we’d get a Fed rate hike and that would give us a nice boost that would be a shot in the arm of confidence for the economy.” Some strategists have been paring back their expectations and now see smaller stock market gains, but Goldman Sachs strategists Tuesday said they see an actual decline. One of the biggest headwinds is China’s economic growth which Goldman describes as “much slower than we previously assumed.” Brent, the global benchmark for crude, has tumbled about 25% since June.

As the firm aptly notes, the “outlook for future gains has diminished.” As you may recall, in early September, the firm’s commodities team cut estimates for both Brent and West Texas Intermediate (WTI) crude adding that prices could hit $20 a barrel. Savita Subramanian, a strategist at Bank of America Merrill Lynch, cut her year-end price target Sept. 8, citing the stock market correction and Bank of America’s Sell Side Indicator model that moved from positive to neutral on U.S. stocks. Morgan Chase & Co. strategist Dubravko-Lakos Bujas cut his 2015 estimate Aug. 25, attributing the move to continued U.S. dollar strength and technical deterioration. The upside risks highlighted by the strategists include a heavier pace of corporate share buybacks and a tactical, short- term bounce driven by undue pessimism.

Historically, S&P 500 price-to-earnings multiples fell by an average of 8% during the three months following Fed “liftoff” in 1994, 1999 and 2004. While the market puts higher odds of a first-quarter rate increase, analysts expect volatility around the Oct. 28 and Dec. 16 meetings. “I think the Fed has painted themselves into a box,” said Jeffrey Saut, Raymond James chief investment strategist. “My model has always said the Fed raises in November even though there’s not a meeting.” Saut said the market would benefit from a rate hike.

For the first time since 2010, sales growth for S&P 500 companies (excluding Financials and Utilities) has turned negative and may “shrink 3% in 2015” according to Goldman estimates. Markets have also been monitoring Washington where Congress was expected to pass a spending bill Wednesday to prevent the government from being shut down. But that vote would only cover an extension that would bring it up for another vote in December, around the time the U.S. will be getting close to its debt ceiling and will need a congressional extension. “I actually think that’s not going to be a problem.

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