Signs of an improving US economy and a liquidity boost from the European Central Bank have lifted expectations for the main US share market indexes, but most of the year's gains may be in the rear view mirror after a sizeable rally, a Reuters poll of market analysts found.
Forecasts for end-2012 levels have increased over 6 percent compared with those made late last year before stocks posted their best first quarter in 14 years. The median forecast for the Standard & Poor's 500 at the end of 2012 is now 1,427, compared with 1,340 in December. That represents an expected gain of 13 percent this year, according to the median forecast given by the 40 respondents polled over the last week.
But with the market up almost 12 percent already, there may be little left to add. The projected rise of 1.5 percent from now until the end of the year is the weakest of any of the 20 stock indexes around the world covered by the Reuters survey. Still, that follows a blistering rally that has seen the best first quarter since 1998 and pushed the S&P 500 up over 30 percent from lows hit in October. Much of the rally has been attributed to signs of a better US jobs market as well as the European Central Bank removing the immediate risk of a banking crisis by advancing cheap loans to the region's banks.
"This is not a year about economic growth or earnings growth, it's about fear receding, the crisis premium coming out of risk assets," said Bob Doll, chief equity strategist at BlackRock, which manages $1.56 trillion in equities. The ECB funnelled over 1 trillion euros into the financial system with twin ultra-cheap funding operations in December and February to head off a credit crunch that risked exacerbating the euro zone crisis and threatening the currency bloc's future. Doll's year-end target this year is 1,350, but he has said the S&P could rise as high as 1,550 if the conditions are right.
"If Europe stays off the front page and things remain acceptable in the Middle East, we could see another 10 percent from here," he said. US unemployment has fallen to 8.3 percent from 9 percent in September, which has supported the market. But Federal Reserve Chairman Ben Bernanke said this week that recent data may be presenting too optimistic a picture, suggesting monetary policy will remain accommodative. Investors have a tendency to extrapolate recent experience indefinitely into the future, a phenomenon well known to market psychologists and bubble theorists. Barry Knapp, chief market strategist at Barclays, believes economic expectations have become detached from reality. He is calling for a high single-digit correction in the second quarter, saying some of the improvement in the US labour market has been "borrowed" from the future because of the warm winter.
"We don't think the economic outlook is improving as much as the markets are pricing right now," he said. "All the talk about the economic outlook having improved will start to dissipate. You've already seen some evidence of pressure on the lower-end consumer; things like food sales have been pretty soft."
Knapp says that campaigning for the presidential election in November could hurt consumer and business confidence as politicians battles over issues such as taxes and spending. In addition, high oil prices will hit consumers, the effects of easy monetary policy will wear off, and first quarter earnings season will disappoint, he said.
The fourth-quarter company results season was the worst since 2008 in terms of firms beating estimates. That was largely overlooked by a market in the middle of a liquidity surge, but it may come home to roost this quarter. "In April there will be margin pressures evident in some of the US consumer sensitive sectors like consumer discretionary and staples for example," said Knapp.
This helps explain why strategists see the market largely moving sideways for the next three months. The midyear forecast for the S&P is 1,368, a slight decline from Wednesday's close of 1,405.54. The Dow industrials are expected to rise by nearly 100 points to 13,200, according to the poll.