Strategists Take On History in Calling S&P 500 Gains Exhausted

(Bloomberg) -- Wall Street strategists are fighting historic odds when urging investors not to chase the rally in the U.S. stock market.

They’re predicting the S&P 500 Index will see momentum fade in the second half after shares climbed 8.2 percent for the best first-half performance since 2013. The average year-end prediction, 2,439, represents a 0.6 percent increase by December, the least bullish forecast at this time of year since 1999, data compiled by Bloomberg show.

A factor arguing against the gloom is history, according to a study by CFRA chief investment strategist Sam Stovall. He divided the S&P 500’s first-half returns since 1946 into five categories and found this year’s performance ranks in the group with the highest frequency of rallies in the second half.

During the years when the S&P 500 went up between 7 percent and 12 percent in the January-June period, stocks went on to rise 87 percent of the time in the next six months, with increases averaging 5.1 percent.

Equities fell for the week just ended as the tech selloff resumed, offsetting a rally in banks. The S&P 500 slipped 0.6 percent to 2,423.41 over the past five days and Dow Jones Industrial Average retreated 0.2 percent. Despite the losses, both gauges finished June with a third straight monthly advance.

The Nasdaq 100 Index dropped 2.7 percent for the worst week of the year, reversing its gain for June to a loss. The decline ended a seven-month winning streak, the longest since 2009.

Among the 20 strategists surveyed by Bloomberg, stretched valuations and decelerating profit growth are often cited as reasons for caution. Yet stocks have shrugged off everything from monetary tightening to oil’s slump to drama at the White House, surging past Wall Street forecasts that at the start of the year were the least bullish in more than a decade. (Strategists have underestimated equity returns in all but two years since 2009.)

Some are playing catch-up amid the equity rally. This month, Jonathan Golub at RBC Capital Markets boosted his target for the S&P 500 to 2,600 from 2,500 while David Kostin at Goldman Sachs Group Inc. increased his by 100 points to 2,400. Oppenheimer & Co.’s John Stoltzfus said he’s reviewing his forecast after the index topped his projection of 2,450.

Others are sticking to bearish calls. Tom Lee, Fundstrat Global Advisors co-founder who’s the most bearish with a prediction of 2,275, last week slashed his S&P 500 earnings forecasts for this year and next, citing weaker inflation, rising labor costs and a delay in President Trump’s growth agenda.

Savita Subramanian of Bank of America Corp., whose target sits at the same level as Stoltzfus, said the market is likely to pull back 5 to 10 percent in coming months.

While stocks have suffered second-half declines averaging 12 percent in years since 1928, Bespoke Investment Group LLC found the markets that start the year steady tend to finish steady. With a peak-to-trough retreat at 2.8 percent since January, the S&P 500 is on course for the second-smallest drawdown behind 1995. Among the 16 prior years where the first six months were similarly calm, the index averaged a maximum drawdown of 6.3 percent in the second half.

Laszlo Birinyi, a steadfast bull during the eight-year equity rally, said the prevailing caution among strategists is one reason why he’s optimistic. The president of Birinyi Associates Inc. recently said his firm would buy calls betting on the S&P 500 to reach 2,500 by September.

“Wall Street continues to be unenthusiastic regarding the market,” Birinyi wrote to his clients this week. “New highs are generally greeted with a yawn. Especially encouraging is the fact that investors have cash,” he said. “As the year proceeds, we are actually feeling better about the market.”

--With assistance from Cecile Vannucci

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Chris Nagi, Richard Richtmyer