Biggest S&P 500 Gain Since 1998 Forecast by UBS, Barclays

By Inyoung Hwang - Oct 7, 2011 4:12 AM GMT+0700
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Goldman Sachs Group Inc.’s David Kostin cut his price estimate for the S&P 500 in 2011 this week for the third time in three months, reducing it to 1,200 from 1,250. Photographer: Noah Berger/Bloomberg

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Traders work on the floor of the New York Stock Exchange in New York, U.S. Photographer: Jin Lee/Bloomberg

Wall Street strategists say the Standard & Poor’s 500 Index, after falling within 1 percent of a bear market this week, will post the biggest fourth-quarter rally in 13 years even after they cut forecasts at a rate exceeded only during the credit crisis.

The benchmark index for U.S. stocks will climb 14 percent from yesterday to end 2011 at 1,300, according to the average estimate of 12 strategists surveyed by Bloomberg. The last time they were this bullish in October was 2008, when the group predicted a 27 percent gain and the index lost 18 percent.

Analysts from Oppenheimer & Co. to UBS AG and Barclays Plc say equities will rebound from a decline of 19 percent since April as policy makers prevent a default by Greece and profit in the S&P 500 climb to $95.85 a share in 2011. Europe’s worsening debt crisis and the U.S. government’s loss of its AAA credit rating led strategists to cut their S&P 500 forecast in the past two months from an average level of 1,401.

“Investors are way too bearish and are being swayed by macro variables,” Brian Belski, the New York-based chief investment strategist at Oppenheimer, wrote in an e-mail on Oct. 4. “Fundamentals drive stocks,” he said. “U.S. portfolios are not positioned for a positive third-quarter earnings season.”

Services Expanded

A report showing U.S. services industries expanded faster than economists predicted in September and speculation Europe will contain losses tied to sovereign debt pushed the S&P 500 up 1.8 percent to 1,144.03 yesterday. After falling to 1,074.77 intraday on Oct. 4, the index surged 6.4 percent through yesterday. The S&P 500 rallied 1.8 percent to 1,164.97 today.

Belski is sticking to his forecast from December that the S&P 500 will end this year at 1,325, up 16 percent from yesterday’s closing level. When he gave his prediction, the average strategist projection for the end of 2011 was 1,379, according to data compiled by Bloomberg.

Strategists shouldn’t be so optimistic given the severity of the European debt crisis, said Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina.

“The best case is we establish a foundation with some modest gains in the fourth quarter, but it’s too optimistic” to expect a rally, he said. Strategists “need to better assess the European debt situation,” Teal said in a telephone interview yesterday. “The general trend is downward.”

Kostin Cuts Estimates

Goldman Sachs Group Inc.’s David Kostin cut his price estimate for the S&P 500 in 2011 this week for the third time in three months, reducing it to 1,200 from 1,250. While the U.S. will likely avoid a recession, the economic recovery is stagnating, according to the equity strategist.

“The unstable macro environment is likely to persist for the foreseeable future,” Kostin wrote in an Oct. 4 report. “Investors believe a non-trivial probability exists that the crisis will trigger a global financial dislocation similar to 2008.”

Wall Street firms stuck with bullish forecasts through the beginning of August as the S&P 500 tumbled amid concern U.S. lawmakers would fail to reach an agreement with President Barack Obama to raise the nation’s debt limit. The index fell 11 percent between July 22 and Aug. 5.

Strategists kept their average forecast at 1,401 from July 6 through Aug. 8, when it was cut to 1,389. The measure retreated to an 11-month low of 1,119.46 on Aug. 8 after S&P cut the American credit rating.

Solving Greece

Stocks will rebound as investors become convinced leaders in Europe can solve the sovereign crisis, according to UBS’s Jonathan Golub. The cost to rescue Europe’s banks may reach $2 trillion for governments and private partners, BlackRock Inc. (BLK) Chairman and Chief Executive Officer Laurence D. Fink said yesterday at an event in Toronto.

“Worst-case outcomes are not going to play through,” Golub said in a telephone interview on Oct. 4. “You have 17 countries that have to coordinate their actions, which makes the process more cumbersome, but that doesn’t mean they can’t come to a resolution.”

Golub said in December that the S&P 500 would end this year at 1,325. He raised the estimate to 1,425 in February before cutting it to 1,350 last month, an 18 percent rise from yesterday’s closing level. Golub said in 2010 the S&P 500 would finish the year at 1,350 before reducing that estimate to 1,150 in July. The gauge rallied 13 percent to 1,257.64 last year.

Russia Default

The stock index jumped 21 percent in the fourth quarter of 1998 after Russia’s default, which caused the collapse of hedge fund Long-Term Capital Management and sent the S&P 500 down 15 percent in August. The measure slumped 12 percent in August and September of this year.

Global equities entered a bear market on Sept. 22, after the MSCI All-Country World Index extended its drop since its peak this year to more than 20 percent. About $3 trillion has been erased from U.S. equities since April 29, sending the S&P 500’s valuation to 12.5 times earnings, near the lowest level since March 2009, according to data compiled by Bloomberg.

While investors are abandoning stocks amid concern Europe’s crisis will worsen and growth in Asia will slow, equities will rally in the fourth quarter as economic and policy outlooks improve and the Federal Reserve provides additional stimulus, according to Barclays’s Barry Knapp. The central bank announced plans on Sept. 21 to buy $400 billion of long-term debt.

Knapp estimates the S&P 500 will rise to 1,325 in 2011. He lowered his prediction from 1,450 a month ago.

“The U.S. situation looks fine,” Knapp, the New York- based head of U.S. equity strategy, said in a telephone interview on Oct. 4. “If we were living in isolation here, the market would be much higher.”

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net