As we near a close to 2015, it is time to look forward to 2016. We have done this in 2014 and 2015, so it is becoming a tradition to see which strategists did well and which missed the mark. What do the experts think will happen in 2016 and should we even care.
Perhaps you are familiar with Philip Telock's landmark UC Berkeley study that looked at 82,000 predictions over 25 years by 300 leading economists. It turned out that their so called expert views were no better than random guesses, and worse, the more famous, the less accurate the prediction.
Last year the strategists predicted a weak bull market for 2015, but it turned out they were still too optimistic. Their average forecast was for a 6% gain in the S&P 500 to 2218. However as of today the S&P 500 stands at 2074 which is down slightly from its 2089 close at year end 2014. The two that were closest to the mark were Goldman's David Kostin and Barclays' Jonathan Glionna who both forecast a year end close of 2100.
Predictions for 2016
After looking at all the Wall Street reports, I compiled the predictions from 12 top stock market strategists. For 2016, the average price target for the S&P 500 is 2215 or a 6.8% return. Let's take a look at the forecasts and I've also included their predictions from last year so you can see if they are more bullish or bearish.
The Best Forecasters in 2015 Diverge in 2016
While Kostin and Glionna were the best forecasters in 2015, their views have diverged a bit for the year ahead. Let's take a look at their reasoning.
Goldman's Kostin thinks it will be deja vu all over again as his S&P target is 2100 as it was a year ago. He believes that rising rates will compress PE multiples.
Fed hikes will begin in December and continue steadily for several years. When investors realize tightening will be more sustained than most expect, the P/E multiple will contract and offset the positive impact of higher EPS.
He is expecting a steeper path of tightening from the Fed than is implied by the market because there will be a pickup in inflation in 2016. He suggests investing in companies with strong balance sheets, firms with high US sales and growth stocks.
On the other hand, Barclays' Jonathan Glionna is getting slightly more bullish with a price target of 2200, up 100 points from last year's target.
Our macro narrative is simple, if obvious. We believe U.S. interest rates will go up leading to a stronger U.S. dollar. This should cause earnings per share growth and returns to remain subdued. We forecast 4% EPS growth and a 5% gain for the S&P 500. We maintain our view that return expectations should roughly match EPS growth expectations. In other words, we do not expect any more expansion in valuation multiples.
While this bull market is getting long in the tooth, there are still bullish strategists remaining. Perhaps it is no surprise that last year's three most bullish strategists are still the most bullish for 2016. Oppenheimer's John Stoltzfus, RBC's Jonathan Golub and Fundstat's Tom Lee are all predicting double digit returns for the S&P 500.
Here are their comments for what they are worth.
We look for the price of oil to find a bottom when the market eventually recognizes that it has been oversold. We look for the dollar to eventually find a resistance level that will hold sometime in 2016 as economies outside the U.S. continue to improve and show evidence of sustainable growth that will attract investment flows along with demand for foreign imported goods.
2015 was marked by falling oil prices, a diminishing global growth outlook, and flat rates. Our constructive 2016 outlook is predicated upon stabilizing commodity prices, and an incrementally higher dollar and rates. All of this should result in a substantially higher earnings trajectory as well as a modest re-rating of stocks.
We believe there is potential for positive surprises in 2016. Global growth re-accelerates in 2016 (3.0% in ’15 to 3.2-3.3%) as US growth strengthens, EM stabilizes and Eurozone further firms: US growth should improve on heels of better consumer income, gov’t adding to growth (especially election year), less drag from USD.
What do you think will happen in 2016? Are you a bull or a bear for the New Year?