S&P 500 Melt-Up Is So Hot It’s Making Cheerleaders Into Skeptics

(Bloomberg) -- You know something strange is going on when the stock market’s most reliable optimists sound like cranks.

Wall Street strategists have been thrust into just such a role at the end of 2019, as this year’s stunning recovery in the S&P 500 pushed it hundreds of points above where they thought it would be. So hot have stocks gotten that professional prognosticators are having a hard time mustering much optimism for next year.

Which is unusual, for them. A reliable tradition on Wall Street is the propensity of stock strategists -- as a group -- to predict the same thing over and over. Since 2009, they’ve rarely wavered from a script in which they say the S&P 500 will rise about 10% in the coming year. Right now, they see half that.

“We see the market already pricing in a strong rebound in macro and earnings growth, back up to the peaks of this cycle, much stronger than we expect,” said Binky Chadha, chief global strategist at Deutsche Bank. Chadha saw the S&P 500 rising to 3,250 this year -- the highest of anyone tracked by Bloomberg -- and expects it to stay there at the end of 2020.

The index closed Friday at 3,146, up 25% year to date.

Together, professional forecasters are giving the least optimistic annual outlook in more than a decade. Their average call is for the S&P 500 to end next year at 3,280, going by 17 estimates compiled by Bloomberg. As it stands now, that represents a 4.3% expected increase, the smallest for any year since 2004.

A few things are influencing the muted tone. One, strategists failed to anticipate the magnitude of this year’s recovery, which as of Friday had driven the S&P 500 up 34% from its December 2018 low. The market’s latest leg up keeps narrowing the size of the advance they see in 2020. In addition, strategists remain concerned about the relatively anemic earnings growth upon which this year’s rally is based. Virtually all of this year’s gains are the result of fattening valuations, a trend they don’t see continuing.

Big misses when stocks rally are a predictable outcome for strategists, who over the past two decades have forecast gains in U.S. stocks that average out to 9.5%. While that may seem lemming-like, it’s an acknowledgment of the market’s general tendency over time. The annualized gain in the S&P 500 is 9.4% since its inception.

Strategists have also never called for a down year in the period Bloomberg has tracked them. Still, their 2020 forecast marks a notable step down. Betting on a repeat of 2019 would be a mistake, they warn, highlighting event risks such as next year’s U.S. presidential elections and a re-escalation of trade tensions.

At least three strategists expect the S&P 500 to be lower a year from now. Mike Wilson at Morgan Stanley and Francois Trahan at UBS Group AG have both set a year-end target of 3,000, while Sophie Huynh at Societe Generale has 3,050.

On the bull side is Jonathan Golub at Credit Suisse, whose 3,425 target is by far the highest among those tracked by Bloomberg. Citing an improving earnings outlook and relatively attractive valuations, Golub says it’s too early to bail even with the record-long bull market heading toward its 12th year.

At 17.8 times forecast profits, the S&P 500 traded at a multiple that’s higher than any time since the dot-com era, except for a few months in late 2017 and early 2018, data compiled by Bloomberg show. Still, with the Federal Reserve in an easing mode and Treasury yields hovering near record lows, stocks can hardly be framed as excessively over-valued.

“The S&P 500 valuations don’t necessarily start off as inexpensive as” markets like Europe, said Sean Darby, global equity strategist at Jefferies whose target is 3,300. “But the cyclicals offer a lot of earnings upside if the global economy begins to resynchronize.”

Strategists have forecast annual gains of 5% or less three times before. In 2014 and 2017, they ended up under-shooting by at least 7 percentage points. In 2005, they were right on target.

“It’s important to understand what the consensus is,” Dan Veru, chief investment officer at Palisade Capital Management, said by phone “Expectations are very low. I always want to take the other side of that.”

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

To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net

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