Strategists Left in Dust With Targets Trailing S&P 500 by Most Ever
By Lu Wang June 8, 2020 (Bloomberg)
- Equity benchmark tops Wall Street’s year-end target by 9%
- Is it a sign of under-estimated market, or some pain to come?
For another illustration of the power of the equity rally, look at where the market stands now relative to forecasts from Wall Street’s best and brightest minds.
After three weeks of gains that are on the verge of erasing its loss for the year, the S&P 500 is approaching 3,200, sitting 9% above the projection of 2,933, the average level where strategists expect the index to finish 2020. That’s the widest gap in Bloomberg data going back in 1999.
Like a host of buy-side luminaries, strategists have been too cautious in estimating the speed of the recovery. The S&P 500 has rallied more than 40% from its March low amid central bank stimulus and better-than-expected economic data, defying warnings about elevated valuations and a collapse in profits. The Nasdaq 100 last week climbed to an all-time high, making a full recovery from this year’s bear-market decline.
All the gains are putting pressure on professional forecasters, who started the year with a cautious view and turned even more bearish during the coronavirus lockdown. Some, like Tobias Levkovich, Citigroup’s chief U.S. equity strategist, say the sketpicism is still warranted.
The S&P 500 is now trading at 21 times next year’s profit estimates of $150 a share, a multiple that Levkovich considers stretched. He’s sticking to the price target of 2,700, saying investors are ignoring risks such as possible Covid-19 reinfections and the upcoming presidential elections.
“We are getting questions about lifting those levels. We think that would be premature given all the risks out there,” Tobias Levkovich wrote in a note to clients. “While 2,700 could be too low by some measures, we think 3,200 is too high since it is based on a premise that all problems have been resolved when so many unknowns suggest otherwise.”
At Friday’s close of 3,193.93, the S&P 500 exceeded all but four strategists’ year-end targets, based on a survey of 18 Wall Street prognosticators last month. The most bearish, Maneesh Deshpande at Barclays, sees the S&P 500 ending December at 2,500, or a 22% decline.
“Consensus expectations are for a V-shaped recovery in earnings, which we think is too optimistic,” Deshpande said. “In addition to the mounting geopolitical risk surrounding the escalating U.S.–China tensions, we note that social activity has yet to pick up and expect capex to be reduced, as risks of a second wave of infections is high.”
While strategists’ record in forecasting the S&P 500 has been spotty — they missed the benchmark’s gain in 2019 by more than 10% percentage points and overshot the market by a similar amount in the previous year, their current stance echoes prevailing skepticism among institutional investors.
From computer-driven traders to stock pickers, money managers have been reluctant to embrace the equity rally. Their equity positioning has climbed from a record low but is still stuck in the 8th percentile of a historic range, according to data compiled by Deutsche Bank. From a contrarian perspective, such pessimism bodes well for the market because it means potential buying power.
“Equity positioning has risen from rock bottom but is still extremely low,” Deutsche Bank strategists including Parag Thatte and Binky Chadha wrote. “Institutional money across the systematic as well as discretionary spaces is now chasing.”