Expectations for solid economic and earnings growth will help US stocks find slightly firmer footing in the second half of the year, according to a Reuters poll of strategists who expect the market to gain about 6 percent between now and year-end.
While first-quarter earnings gains of 26.3 percent for S&P 500 companies have sparked concerns growth may have peaked for the current up trend, profit growth for the rest of this year and next will stay strong enough to support market valuations, strategists said.
The S&P 500 will end this year at 2,850, up 6.0 percent from Tuesday's close and up 6.6 percent from the end of 2017, based on the median forecast of 58 strategists polled by Reuters in the last two weeks. It will be at 2,950 at end-2019. Wall Street has been struggling to post consistent gains since early February, when the S&P 500 dropped more than 10 percent from its record high and volatility picked up dramatically, leaving many investors worried that a nine-year bull run was ending.
A US tax overhaul approved by Congress late last year - the biggest in more than 30 years - included hefty tax cuts for corporations, resulting in a jump in profit forecasts for 2018 and a fresh run to record highs on Wall Street. Analysts now forecast S&P 500 profit growth of 22 percent for all of 2018, based on Thomson Reuters data. Along with the tax cuts, the US economy is expected to benefit from increased hiring.
"The most important thing by far is, is there a reasonable likelihood of a recession in the next nine to 12 months? Right now it looks like the likelihood of having a recession is low," said Jonathan Golub, chief US equity strategist at Credit Suisse Securities, which has a year-end target of 3,000 for the S&P 500. Most strategists polled were confident or very confident that stocks around the globe will continue rising over the next 12 months, and most felt emerging markets were far more at risk of a sell-off over the next 12 months than developed ones.
But the poll's median forecast is down slightly from the end of February, when the S&P 500 was projected to end 2018 at 2,900. Among the biggest market risks is whether the Federal Reserve boosts US interest rates faster than investors expect. The Fed has lifted borrowing costs once so far this year, in March, and policymakers are about evenly split between those who expect two more rate rises this year and those who anticipate three.
Another risk, according to some strategists, is the US midterm elections later this year, which could result in more control for Democrats in Congress and possibly threaten the agenda of President Donald Trump and other Republicans. "I don't think the story in equities is compellingly bullish. It's more that bonds look terrible. Equities look better than bonds, and you have to put money somewhere," said Robert Phipps, director at Per Stirling Capital Management in Austin, Texas.
Many strategists still favour technology and other sectors with strong growth over more defensive ones. The S&P 500 consumer staples index is the worst-performing sector year to date, while the technology index is the top performer. The poll also showed the Dow Jones Industrial Average ending 2018 at 25,750, up 5.7 percent from Tuesday's close. The index is forecast to end 2019 at 27,200.
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