Biggest S&P 500 Skeptic Trahan Boosts Forecast After Rally

(Bloomberg) -- Wall Street’s most pessimistic equity strategist scrapped a call that U.S. stocks would fall in 2020 after a market surge late last year that almost nobody saw coming.

Francois Trahan, head of U.S. equity strategy at UBS Group AG, raised his year-end target for the S&P 500 Index to 3,250 from a previous target of 3,000 set in November. His old forecast was tied with that of Morgan Stanley’s Mike Wilson as the lowest among those tracked by Bloomberg.

Trahan’s new call is hardly bullish -- the equity benchmark was down 0.1% to 3,241.95 as of 3:15 p.m. in New York -- but he joins other strategists in turning more optimistic after the S&P 500’s 29% rally in 2019 exceeded almost everyone’s expectations.

With investors comforted by interest-rate cuts that the Federal Reserve carried out last year, Trahan argues that it takes time for lower borrowing costs to work though the economy and the benefits won’t take hold until 2021. Stocks are likely to pull back in the first half as earnings expectations are at risk of falling, and then recover during the later half in anticipation of a pickup in growth, he says.

“We see this year as having two distinct phases for equities as markets transition from pricing in slower growth to pricing in an economic recovery,” Trahan wrote in a note. “We expect a V-shaped year for the S&P 500.”

Professional prognosticators have been forced to boost their predictions for the new year as an equity rally late last year made them look like skeptics. Based on Bloomberg’s latest survey, forecasters provided the least optimistic annual outlook in two decades. Their average call was for the S&P 500 to end the year at 3,318. That represents a 2.7% expected increase, the smallest for any year in data going back to 1999.

At least two strategists have turned more upbeat. Tobias Levkovich at Citigroup last month increased his view by 75 points to 3,375 while Lori Calvasina at RBC Capital Markets this week boosted her target to 3,460 from 3,350.

And Morgan Stanley’s Wilson started to focus on the potential for the S&P 500 to surpass a year-end fair value range of 3,000 to 3,250 that’s estimated by the firm. The index could rise to as high as 3,500 in the first half because of central bank support, he said in a Monday note.

“Markets can overshoot fair value in liquidity driven bull market,” Wilson wrote. “Depending on how the economic and earnings data came in during the year will determine if we need to raise our year-end targets or not.”

--With assistance from Gaurav Panchal.

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

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Richard Richtmyer, Rita Nazareth

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