After blistering gains in the first half of 2013, the US stock rally is expected to decelerate in the latter part of the year, advancing modestly beyond record highs, a Reuters poll found. The S&P 500 has jumped 15 percent year-to-date, repeatedly notching new records on extraordinarily stimulative monetary policy from the Federal Reserve and other global central banks.
But the day after the S&P's closing high of 1,669.16, on May 21, Fed Chairman Ben Bernanke suggested the Fed could start to reduce stimulus, leading stocks to pare gains. "While the bull market isn't over yet, we do see limited upside at these levels," said Savita Subramanian, head of US equity and quantitative strategy at BofAML Global Research, citing the gains already seen so far this year. The outlook for stimulus is a paradox for investors, as the Fed is expected to reduce its bond-buying program only when the economy is so strong that it is no longer needed.
Yet, as stimulus has been widely credited with fuelling the market's gains this year, even the threat of a pullback has been enough to stall markets. The S&P is predicted to end 2013 at 1,700, according to the median forecast from 42 analysts surveyed in the past week. That 19 percent gain for 2013 would mark the best year since 2009, but just a 4 percent rise from Tuesday's close. Similar gains are likely for the Dow Jones Industrial Average, expected to end 2013 at 15,600 and giving it an annual gain of 19 percent and 3 percent up on Tuesday's close.
While the consensus view for both indexes is above those in a March poll - both of which have already been surpassed - the range of estimates suggest volatility in stocks could persist. Year-end targets for the S&P ranged from 1,400 to 1,800. "The biggest headwind for the market will be any rumour of tapering, while clarification from the Fed is one of the biggest potential tailwinds," said Kristina Hooper, head of portfolio strategies at Allianz Global Investors.
A majority of analysts polled expect the Fed to begin slowing its quantitative easing in the fourth quarter of 2013, though it won't end completely for several months after that. An end to the program is the primary reason a rally may be harder to come by next year. The S&P is seen rising slightly in the first half to 1,755 and similar gains are pencilled in for the Dow, with the bluechip index climbing to 16,100 mid-year. Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston, said, "there's no question" the biggest factor helping the market was the Fed.
Estimated earnings growth in 2013 is 7.5 percent, according to Thomson Reuters data. The forward price-to-earnings ratio on the S&P has risen to 14.4 from 13.1 at the beginning of 2013. The CBOE Volatility index, a measure of investor anxiety, is down around 7 percent so far this year. However, it has jumped 32 percent in the second quarter.