Wall Street Strategist Forecast More Stock Gains in 2015

By Alexandra Scaggs 

        Wall Street has a message for U.S. stock investors: Don't fear the Federal Reserve in 2015.
        The U.S. central bank is expected to raise short-term interest rates this year for the first time in nearly a decade, but strategists still expect U.S. stocks to end the year with gains.
        The Fed's aggressive stimulus efforts have helped support stock-market gains since the financial crisis, analysts say, so some fret that higher interest rates could put the brakes on stocks' multiyear rally. Last year, as the U.S. economy heated up, central-bank officials started to discuss when and how they would raise interest rates.
        But many strategists say any rate increase should be viewed as an endorsement of the U.S. economy's ability to withstand higher borrowing costs.
        Wall Street strategists see the S&P 500 rising 8.2% this year, based on the average forecast of banks and money-management firms polled by research firm Birinyi Associates. Accelerating economic expansion in the U.S. and strong corporate-earnings growth will continue to power the rally, they say.
        That would come after 2014's rise of 11.4% for the broad stock index, which ended up performing better than most prognostications and notching 53 record highs. On Friday, the S&P 500 was nearly unchanged, closing at 2058.20.
        "There's this obsession with the potential headwinds from the Fed," said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. "But we're talking about very good stock-market returns for two to three years from now."
        Stock strategists are a perennially bullish bunch: Since 2000, the average forecast has called for higher share prices each year. Analysts didn't foresee the dot-com bust of the early 2000s or the financial crisis. But last year, many undershot the index, leaving them scrambling to raise their targets.
        This year, even the least bullish analysts think the Fed's rate increase isn't likely to deal a lasting blow to stocks. Everyone polled by Birinyi expects U.S. stocks to end the year higher.
        Investors have been concerned that rising interest rates could prompt declines in the stock market, because they could make high-yielding stock sectors less attractive compared with bonds. And some worry higher rates could dent companies' profit margins as it gets it pricier to borrow.
        While stocks could take a brief hit from a rate rise, strategists say, the Fed move would be a sign that the economy is strengthening, which should be good for stocks. Studies from banks and money-management firms show that stocks can continue to climb during periods of rising interest rates, especially in the early stages of a tightening cycle.
        Most strategists agree that corporate-profit margins will remain near record highs, even as borrowing costs rise. Jonathan Glionna, head of U.S. equity strategy at Barclays PLC, said companies should be able keep their overall costs under control this year.
        "Profit margins are going to be key... [and] we can get a little bit of profit-margin expansion," he said. Mr. Glionna predicts the S&P 500 will rise by just 2% in 2015 because of weak global economic growth, mainly outside the U.S.
        In contrast, Mr. Golub of RBC is more bullish, saying that global investors don't have many options apart from U.S. stocks. In 2014, he was one of the first analysts to sharply raise his end-year target for the S&P 500 in anticipation of faster U.S. growth.
        "The U.S. is going to be a positive outlier, not only for the next year, but for the next decade," he said. He sees the S&P 500 rising 13% this year to 2325.
        Japan has slipped into recession and European economies are treading water, Mr. Golub noted. Meanwhile, U.S. bonds are offering relatively paltry yields. The yield on the 10-year Treasury stood at 2.123% on Friday. And commodities markets, which gained cachet among mainstream investors in the 2000s, have been beaten down by excess supplies of raw materials.
        To be sure, some strategists are concerned about the stock market's relatively high valuation, saying that it leaves stocks vulnerable to a sharp pullback if earnings disappoint or if the economic outlook darkens.
        Based on his year-end prediction for the S&P 500, Mr. Golub sees share prices at 16.7 times forecast earnings at the end of 2015. That is above where it closed 2014, at 16.3, and its 10-year average of 13.9, according to data provider FactSet.
        Rich valuations in the U.S. will prompt investors to gravitate to stocks in Japan and China, which are cheaper, said Russ Koesterich, chief investment strategist at BlackRock Inc.
        "There's much less room for [valuation] expansion than there was five years ago" in U.S. stocks, he said. So he is recommending that BlackRock's clients consider buying stocks in Asia as well.
        The S&P 500 is also pricey when assessed on another metric, expected sales, which can't be boosted by share buybacks and cost-cutting, measures that have contributed to buoyant share prices. The index is trading at 1.7 times its expected sales for 2015, nearly 31% above its 10-year average of 1.3, according to FactSet.
        "There is a clear missing ingredient in terms of earnings, which is revenue growth," said Barclays's Mr. Glionna.
        Mr. Glionna recently halved his forecast for companies' 2015 revenue growth, cutting it to 2% from 4%. He expects weaker revenue from international markets, due in part to a stronger dollar, and from energy companies, which have been hit by lower oil prices. He trimmed his expectations for profit growth as well, and now expects the S&P 500's earnings per share to grow by 6.8%, down from his previous forecast of 8.5%.
        While the Fed has signaled it is moving toward raising short-term interest rates, the central bank has said it will be patient in doing so. Many investors have taken this as reassurance that the central bank won't rush to raise rates and that, once it starts, the Fed will keep the pace of increases modest.
        Even with higher rates, Adam Parker, Morgan Stanley's chief U.S. stock strategist, believes stocks can rally as long as five more years, taking the S&P 500 to 3000 before the bull market ends. For 2015, Mr. Parker forecasts a climb of 10% to 2275.
        Like many other strategists, Mr. Parker thinks the nearly 50% plunge in crude-oil prices in 2014 will support stocks. Falling gasoline and other energy costs should continue to bolster consumer spending, a trend that is likely to benefit earnings of retailers and other sectors, he wrote in December.
        Any ascent in stocks will be bumpy, though, said Dan Greenhaus, chief strategist at New York brokerage firm BTIG. Daily swings in stocks grew bigger and more frequent in the second half of 2014 as investors began to adjust to the likelihood of rate increases.
        "Stock volatility has risen, and should continue to rise," Mr. Greenhaus said.
        He predicts the S&P 500 will gain 6.9% this year.
        Write to Alexandra Scaggs at alexandra.scaggs@wsj.com
        (END) Dow Jones Newswires

        January 04, 2015 16:24 ET (21:24 GMT)

#FX
#Forex
#AlexandraScaggs
#WallStreet
#StockGains