Even in the face of a spike in market volatility, LPL Financial and Wells Fargo & Co. are doubling down on bold predictions that the S&P 500 will close out the year noticeably higher than where it started.
That's going to be a tall order, because following a rough-and-tumble market in August, that broad stock benchmark is down 5.3% for the year through Wednesday.
LPL, the nation's largest independent broker-dealer, reiterated its prediction in a note to its 14,000 advisers on Tuesday that the total return of the S&P 500 would reach 5% to 9% this year.
“Five-to-nine [percent] felt right to us,” said John J. Canally Jr., LPL's chief economic strategist, in an interview. “We're sticking with that.”
Wells Fargo's Investment Institute, which serves the bank's 15,000 retail financial advisers, on Aug. 25 projected that the S&P would close at between 2,150 and 2,250, representing an increase of 4.4% to 9.3% from the beginning of the year. Wells Fargo reiterated that call on Thursday.
“The target reflects our convictions that we like large-cap domestic equities. We want people to be optimistic and add to their position,” said Sean Lynch, the co-head of global equity strategy for the Wells Fargo Investment Institute. “We see the economy doing better in the second half of the year, and we think that translates to better earnings as well.”
LPL also says that its forecast is based on better U.S. economic growth and forthcoming corporate earnings. The firm cited better economic growth and increased stimulus in Europe and Japan, an accommodative Federal Reserve, low and stable oil prices, the fact that stocks are cheaper on a price-to-earnings basis and the fact that the stock market often enjoys a positive boost in the fourth quarter.
ROCKY PATH
However, it appears that it will be a rocky path for equities. The markets will face a new test early next week as a raft of economic data is released on China's trade balance, industrial production and other measures. Fears that the second-largest economy's slowdown will dampen growth prospects globally have haunted markets for weeks.
Strong data from China will be interpreted by the markets as manipulated; bad data will be seen as a reinforcement of bad news, Mr. Canally said.
A report on the U.S. labor market is also due on Friday. Mr. Canally said that the markets will also look for reassurance from the Federal Reserve, which in two weeks will consider hiking its benchmark interest rate.
“It would be very interesting if the Fed raised rates in September,” he said.
LPL's prediction is based on the total-return version of the S&P 500, which assumes that the owner reinvests all of the cash distributions that they earn from the underlying stocks. All of the other analysts and numbers in this story refer to a different version of the index, which by contrast measures just the price movement of the underlying stocks. On a price basis, the S&P 500 has posted double-digit percentage increases in five of the last six years.
“I'm not any more or less bullish than I was before,” said Doug Flynn, co-founder of Flynn Zito Capital Management, in Garden City, N.Y. “I think there's a lot to like about the market, and there are some things that you shouldn't like, but that's the sign of a healthy market.”
BULLISH PREDICTIONS UNCOMMON
While bullish predictions were the norm earlier this year, they've become increasingly uncommon as the atmosphere around stocks has deteriorated. When the Reuters news agency polled nearly 50 strategists in June,
the median prediction was a 7% increase in the S&P 500 for the year to reach 2,202.
At the time, the benchmark was up 2.1%, at 2,101.49. It closed at 1,948.86 Wednesday, putting it down more than 5% for the year.
Bob Doll, the chief equity strategist at Nuveen Asset Management, is one generally optimistic forecaster who has revised his expectations downward. At the beginning of the year, he expected the S&P to close at 2,200. But corporate earnings simply haven't been strong enough to support such a gain. Those figures were softer than he expected even before the latest bout of volatility, he said.
“Five, six, seven, eight, 9% is quite a gain from here,” said Mr. Doll. “The stock market is going to struggle to be up.”
Mr. Doll is now forecasting the S&P to finish off the year at 2,100, which would be a 2% rise from its 2014 close.
“It's going to take a bunch of weeks to repair the damage, even if this is only a correction in the bull market,” he said.
