Citi's Tobias Levkovich Gives Himself C Grade on 2018 Stock Predictions

(Bloomberg) -- With the year ending, grades can be bestowed on market forecasters. And Tobias Levkovich isn’t happy with his own performance.

While his year-end target for the S&P 500 of 2,800 was better than most, the chief U.S. equity strategist at Citigroup gave himself a “C” for his predictions. With the market heading for the worst annual decline in a decade, his call overshot by about 380 points.

Levkovich’s preference for large-cap stocks over smaller firms proved prescient, but his optimism about stocks such as energy and financial shares was ill-placed. Both industries have fallen into a bear market, with 2018 losses that are twice the market’s.

“Given weaker-than-projected market returns, the growth versus , financials and energy recommendation misses, we assign ourselves a C grade for 2018,” Levkovich wrote in a note to clients.

It’s been a tough year for prognosticators as the equity market swung from euphoria to panic. Strategists rushed to boost their forecasts amid one of the best starts of a year, only to see their optimism getting crushed by a year-end meltdown that drove stocks to the brink of a bear market. At least four of them have reduced their projections for next year as they’re poised to have overestimated the market’s performance by the most since the 2008 global financial crisis.

For now, Levkovich is sticking to his 2019 forecast of 3,100 for the S&P 500, a target that’s a little more bullish than his peers. Citi’s models on earnings and investor sentiment point to a 90 percent probability for higher stock prices in the next 12 months. Moreover, with inflation sitting in a range of 2 percent to 3 percent, that tends to correspond to a price-earnings multiple of 18, he said. The S&P 500 recently traded at 16.6 times profits.

This has been a year when safety ruled, with stocks such as health-care and utilities beating the market. The coming year will see the return of energy and financial shares, according to Citi. As the labor market tightens, wage costs will rise, contributing to higher inflation. In that environment, and cyclical stocks tend to outperform.

“We have argued that rising inflation expectations and higher bond yields next year require a different investor mindset given long-term historical patterns,” Levkovich wrote. “2019 should provide investors with a more positive return outcome given an improved risk/return scenario.”

©2018 Bloomberg L.P.