Investors bet on another good year for US equities
After three consecutive years of double digit gains for US equities, Wall Street analysts are optimistic the current bull market has the legs to run up higher.
Equity strategists have entered 2015 confident that the S&P 500 will accumulate at least a gain of 8 per cent this year, driving the benchmark beyond 2,200 and representing a threefold rise from the low of early 2009, when the current bull run began.
For all the customary optimism of analysts and investors, there is a note of caution as the long standing bull market has certainly priced in a robust recovery for the US economy and thus remains vulnerable should global headwinds and the slide in commodity prices weigh in the coming months.
Investors have already seen how a falling oil price rebounds on markets with the 1.8 per cent drop in the S&P 500 that opened the week as oil dropped to a five and a half year low.
A further advance for large companies within the broad S&P 500 will depend largely on the Federal Reserve's plan to tighten monetary policy - and the volatility it could introduce into the market - along with a stabilisation in crude prices, a strengthening US dollar and a rebound in economic activity in Europe and Asia.
"When we combine a solid economy with a still 'mindful' Fed and a corporate America that has sufficient cash on hand to help continue a mergers and acquisition consolidation trend ... it becomes reasonable to expect a further rally in the S&P 500 in 2015," says Julian Emanuel, a strategist with UBS.
For the coming year, strategists see the S&P 500 climbing 8.3 per cent to 2,229, according to a survey of 19 investment banks and brokerages conducted by the Financial Times.
The 2015 forecasts range from a low of 2,100 for the benchmark index from Goldman Sachs and Barclays to a high of 2,340 by Canaccord Genuity, gains of between 2 per cent and 14 per cent.
And it is not just the sellside that is proving bullish on stocks: institutional investors are betting it will be the best performing asset class in 2015, a survey from Natixis Global Asset Management shows.
"I would overweight US and overweight stocks that tend to derive more of their earnings from the US, a theme that has been working for a little while now," David Joy, chief market strategist at Ameriprise Financial, says. "Returns from the equity markets are going to be demonstrably better than they are from the bond market."
Shallow interest rate rises in the US will probably temper volatility in the new year, analysts say, adding that share buybacks, which hit a US$550bn annualised pace in the third quarter, could add a pillar of stability when the Fed begins to normalise policy.
However, despite near consensus that the US economy will outperform most other developed countries next year, not everyone thinks this spells good news for US equities.
Analysts at HSBC recommend underweighting US stocks in favour of European equities, forecasting 9 per cent earnings per share growth for the former and 13 per cent for the latter - in part because they expect a stronger dollar to weigh on US earnings and a weaker euro to help European exporters.
"US earnings are at record highs and are vulnerable to disappointment," they argue. "The market also looks expensive across a range of valuation metrics."
Diverging monetary policy in China, Japan and from the European Central Bank may also lift foreign equity markets. Strategists from Citi say recent European client meetings have shown fund managers "torn between a stronger US economy and expectations of an appreciating dollar versus arguably more attractive valuations and easing monetary policies elsewhere".
The stronger dollar and weaker oil prices will have a huge effect on US equities in 2015. However, the impact may not always be positive.
Analysts at Deutsche Bank argue that softer oil prices and a strong currency will limit earnings per share for S&P 500 companies to a single-digit growth rate, despite predicting at least a 3 per cent rise in US economic growth.
Companies with a large chunk of their earnings from overseas are also on the sell list due to the impact of the stronger dollar next year.
However, areas such as consumer discretionary, where lower oil prices and a stronger labour market should lead to increased household spending, are seen as doing well.
Financials are also tipped as potential outperformers due to the expected increase in interest rates by the Fed, as well as lower litigation costs in 2015 than the previous year.
Despite the expected market gains, 2015 will probably "prove to be another challenging year for active equity managers", Goldman Sachs warns.
"High valuation and rising rates mean limited S&P 500 gain," Goldman's David Kostin says. The "median stock in [the] S&P 500 currently trades at nearly 18 times forward earnings, a multiple experienced only 2 per cent of the time since 1976".
(c) The Financial Times Limited 2015