By Sue Chang, MarketWatch
MarketWatch photo illustration/iStockphoto
This is an updated version of an article previously published on Dec. 18, 2017.
The new year is still in its early days but the equity market’s relentless rally that has propelled key indexes to new heights is already making one strategist’s forecast obsolete within the first month of 2018.
In December, Wall Street analysts had projected the S&P 500 to hit an average 2,819 by the end of the year. That target has been met and exceeded after 14 days of trading.
On Tuesday, Bank of America Merrill Lynch raised its 2018 S&P 500 target to 3,000 from 2,800 in early December, citing stronger earnings on the back of the tax reform.
But the upgrade comes with a warning.
“We are watching for signs to temper our enthusiasm on the S&P 500. And with 11 of our 19 bear market signposts having been triggered, the risk-adjusted reward of stocks appears less compelling. But note that since 1968, at least 80% of our signposts have been signaled ahead of prior market peaks,” wrote Savita Subramanian, equity and quant strategist at Bank of America.
With Subramanian’s revision, the average year-end forecast for the S&P 500 stands at 2,861, just 0.8% above its recent level. The new consensus forecast also includes targets from Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities LLC, and Tom Lee, managing partner at Fundstrat Global Advisors, which weren’t reflected previously.
As is, 2017 was a hard act to follow with its double-digit gains, record-low volatility and untrammeled exuberance but judging by the market’s extraordinary gains of 6% in less than a month, 2018 is shaping up to be another one for the record books.
The bull market is set to celebrate its ninth birthday in March, and if it remains intact into August, it will officially become the longest in history.
The odds of an extended run in stocks this year appears to be good, as the aging bull will likely get a shot in the arm from the much heralded tax cuts. Still, it also faces challenges from tighter monetary policy around the world and a market viewed as overdue for a pullback of at least 10%.
For 2017, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.95% has surged 19.4%, notching its best year since 2013, when it surged a dazzling 29.6%.
But even amid signs of possible euphoria, Ian Winer, head of the equities division at Wedbush Securities, remains an outlier with his extremely subdued outlook on 2018.
Winer, who predicted the large cap index to slide to 2350, said last month that he expected the tax cuts to be less than meets the eye.
“Because they have essentially given everyone something, the actual rates for taxes are not that much of a boost. Companies have 10 years to repatriate and it’s clear to me you will get nothing but buybacks and mergers and acquisitions—so I don’t attach the same multiple to that,” he said.
Politics, usually a sideshow for the stock market, could also weigh on sentiment as investors become nervous about midterm elections.
“If Democrats somehow get control of even one branch, then you may as well shut down legislative action for two years,” he said.
2018 S&P 500 targets
Aside from slowing momentum, volatility, as measured by Cboe Volatility Index /zigman2/quotes/210598281/delayed VIX -13.69% , is expected to pick up after one of the most placid years in decades.
In fact, Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, warned last month that investors should brace for a crash in the first half of 2018.
Meanwhile, stocks have gone nearly 400 sessions without a 5% correction, matching the longest streak in history.
Even so, that tranquility may not last, resulting in more regular 3% to 5% pullbacks as investors adjust their holdings, according to Binky Chadha, chief strategist at Deutsche Bank.
Here is what other strategists had to say last month about the stock market in 2018:
Richard Hastings, macro strategist at Seaport Global Securities LLC :
“The S&P 500 continues to exhibit evidence that the rally should continue, and that the bigger, long-term story has entered into a cyclical bullish phase. It could take a very exogenous, not-fundamental event—i.e., war, impeachment, natural disasters—to alter the S&P 500’s ascending momentum, in our view. There is some evidence that conditions are resembling market fundamentals observed in the early 1980s. A weaker analog, but also bullish, appears in the mid-1990s cycle.
“It seems possible that the S&P 500 could rally another 7.5%, achieving about 2,837 in early 2018—possibly between March and June 2018. Pricing power from commodities is a very important input into this scenario. 3000 now seems easily within reach later next year, in our opinion.”
Dubravko Lakos-Bujas, U.S. head of equity strategy at J.P. Morgan :