The $1 trillion erased from U.S. equities last month has left bulls from Byron Wien to Laszlo Birinyi and Jonathan Golub unbowed in their predictions that the rally in shares will continue.
The S&P 500's biggest monthly retreat since September has lowered investment sentiment so much that it is safe to buy, said Mr. Wien, vice chairman of Blackstone Advisory Services LP, who foresaw the bear market's end in 2009.
Mr. Birinyi, president of Birinyi Associates Inc., and Mr. Golub, the chief U.S. market strategist at UBS AG, say that the largest first-quarter rally in 14 years left shares due for a decline and that gains will resume.
The losses last month heightened concern that the slowest U.S. recovery from any recession in seven decades is fizzling out.
Although the 6.3% decrease in the S&P 500 was enough for Mr. Birinyi to say that he is “tempering” his enthusiasm, Mr. Wien said that declining forecasts for economic growth have aligned investor expectations with reality, and more disappointments are unlikely.
IT'S TIME TO BUY
“The best time to buy stocks is when people hate them, and they sure hate them now,” said Mr. Wien, whose forecast that the S&P 500 would exceed 1,400 this year came true March 15.
“Who would've thought that 2% growth would be impressive? But that's what we have,” Mr. Wien said.
“Corrections are only natural, normal and healthy — until they happen,” said Tony Dwyer, the chief equity strategist at Canaccord Genuity Securities LLC, who predicts that the S&P 500 will reach 1,575 this year. “The fundamental backdrop is still constructive, albeit slower.”
Stocks rose after China cut interest rates and European Central Bank president Mario Draghi said that officials stand ready to act should the region's growth outlook worsen.
Economists have pared 2012 forecasts for expansion in U.S. gross domestic product since last year. The world's largest economy will grow 2.2%, down from an estimate of 3.3% in February 2011, according to the median estimate of 93 economists surveyed by Bloomberg.
The May selloff left investors with cash that eventually will come back to stocks, said Mr. Wien, a senior strategist for Morgan Stanley and hedge fund Pequot Capital Management Inc. before coming to the world's biggest private-equity firm.
Investors withdrew $7.2 billion from American equity mutual funds during the five-day period ended May 23 after $178 billion of outflows in the previous 12 months, data from the Investment Company Institute show.
Mr. Birinyi, an equities trader at Salomon Brothers Inc. in the 1980s, recommended buying shares at the beginning of last month, saying that rising bearishness was a sign that they would go higher.
In December 2008, Mr. Birinyi said that a bull market was beginning. An investor who bought the S&P 500 at the March 2009 low turned $10,000 into $20,984, including dividends.
“It ain't over,” Mr. Birinyi said.
“Historically, in the last stage of the bull market, it's a very strong rally. The last stage is the one where everyone is in the pool,” Mr. Birinyi said.
“This is still a market where even in the first quarter of this year, there was a lot of skepticism and reluctance and that hasn't changed,” he said.
Mr. Birinyi added Whirlpool Corp. (WHR), the world's largest appliance maker, to his recommendations last month.
The company is up about 28% so far this year, even after dropping 17% in April, and analysts project that earnings, excluding some items,will more than triple this year. Chipotle Mexican Grill Inc. (CMG) and Nike Inc. (NKE), which have outperformed the S&P 500 this year, also are among his picks.
First-quarter profit that topped forecasts failed to help shares of Marathon Petroleum Corp. (MPC). The oil refiner declined 13% last month, the biggest monthly loss since September, even after reporting quarterly earnings that exceeded estimates by 29% on May 1.
Mr. Golub expects the S&P 500 to reach 1,475 by year-end as earnings climb to $105 a share. His price estimate for the S&P 500 is tied for second-highest among 13 Wall Street strategists tracked by Bloomberg.
Although a default in Europe would force him to lower his forecasts, Mr. Golub said that economic conditions in the United States are strong, and European leaders will stem the crisis.
BAILOUT FOR SPAIN
Earlier this month, Spain became the fourth eurozone member to seek a bailout since the start of the region's debt crisis more than two years ago. On June 10, it agreed to accept as much as 100 billion euros ($125 billion) in aid to recapitalize its banks, a plan designed to ease concern that Spain itself could be dragged down by the declining fortunes of its banks.
“The question is whether policy officials are going to watch the euro crumble or whether they're going to take some type of action to avoid the worst-case outcome,” Mr. Golub said. “If there's anything we've learned over the last three years, it's that policymakers are much more able and creative at being able to avoid worst-case outcomes.”
Mr. Dwyer predicts record S&P 500 earnings of $105 a share this year and a P/E ratio of 15, compared with 13.4 now.
With producer prices, excluding food and energy, rising an average of 2.9% this year, expenses are unlikely to curb profits, and the ratio may expand more than that, he said.
Mr. Dwyer predicted in July 2009 that the S&P 500 would be above 1,060 by the end of that year. The measure closed that year at 1,115.10.
“Given the sub-3% core inflation environment, a 15 multiple is the minimum, not even the average,” Mr. Dwyer said. “As long as you don't go into a recession, $105 is very doable.”
The 9.9% slide from April 2 through June 1 is probably ending, according to Mr. Birinyi, who said that the increased bearishness is “encouraging” and recommends that investors stay in equities or start buying them before the last phase of the bull market starts around September.
Financial markets have been battered by elections in France and Greece, concerns over Spanish banking, weakening emerging-markets economies such as Brazil, China and India, and the plunge in Facebook Inc. (FB) stock following the biggest technology initial public offering, according to Mr. Birinyi.
That the S&P 500 has fallen only about 10% is encouraging, he said.
“I did not anticipate that all the wheels would come off the bus,” Mr. Birinyi said.
“Even now, it's not the thickest ice I've ever seen,” he said. “But we're not giving up on the market.”