Citi, BMO Slash S&P 500 Forecasts After Worst Year in Decade

(Bloomberg) -- Citigroup’s Tobias Levkovich and Brian Belski at BMO Capital Markets are the latest Wall Street bulls adjusting their outlooks after the equity sell-off.

Levkovich, Citi’s chief U.S. equity strategist, cut his 2019 year-end forecast for the S&P 500 to 2,850 from 3,100, saying only one of the firm’s dozen valuation models now supports the old target after the S&P 500 plunged 14 percent last quarter. While the new prediction still sees a 14 percent rally this year, it trails the average estimate of 2,975 from the latest Bloomberg survey of strategists.

Belski, chief investment strategist at BMO, reduced his target to 3,000 from 3,150 while keeping his profit estimate unchanged at $174 a share.

“2018 was a humbling year,” Belskie wrote in a note to clients. “After all, the market is rarely wrong, and 2018 was no different -– even if we believe emotions, rhetoric, and innuendo ultimately skewed prices more than we forecasted or accounted for.”

Citi, BMO Slash S&P 500 Forecasts After Worst Year in Decade

The duo joined a growing chorus of professional forecasters scaling back optimism after their average 2018 prediction over-estimated the S&P 500’s return by almost 400 points. Others who have reduced their projections include: Barry Bannister at Stifel Nicolaus, Jonathan Golub at Credit Suisse, Sanford C Bernstein’s Noah Weisberger, and Chris Harvey at Wells Fargo.

The new round of downgrades contrasts with a year ago, when strategists rushed to raise their targets amid an equity rally spurred by tax cuts. Now, fears of a recession are surfacing amid intensified U.S.-China trade tensions and a fourth rate hike by the Federal Reserve. The S&P 500 fell to the brink of a bear market in December, ending 2018 down 6.2 percent, the worst year since the 2008 financial crisis.

Volatility is likely to persist into the new year amid monetary tightening, but worries over a collapse in the economy and profits are overdone, according to Levkovich. The firm’s sentiment gauge, which reached euphoria just before the fourth-quarter sell-off, has swung to panic. In addition, the average analyst estimate for 2019 profit growth has come down to 8 percent from 12 percent three months ago, approaching Citi’s estimate of 6 percent.

“The painful ‘reset’ appears near completion,” Levkovich wrote. “Nothing is guaranteed, but the data suggest that we should be buying into current weakness.”

The strategist lowered his 2019 projection for the Dow Jones Industrial Average to 26,000 from 28,100. The gauge ended last year at 23,327.

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