Stock forecast in second half of year: turbulence
The stock market has been on a frustrating, dizzying roller-coaster ride to nowhere the last couple of years. It’s still not over.
Stock strategists and mutual-fund managers are predicting minimal gains and big swings in price for the second half of the year. That’s because many of the same challenges that yanked investments up and down in the first half are still hanging over the market, including falling profits at companies and the stubbornly slow global economy.
“Flat is the new up” is how strategists at Goldman Sachs described the market in a recent report. They are calling for the Standard & Poor’s 500 index to end the year at 2,100, which would be just a 0.01 percent rise from where it sat Wednesday. Other investment houses have similar forecasts.
A flat market may not be so painful on its own, but prognosticators expect sharp swings in prices also to continue. The first six months of the year have already had 20 days where the largest mutual fund by assets, Vanguard’s Total Stock Market Index fund, lost 1 percent or more. That’s the same number it had in all of 2013.
Strategists say they wouldn’t be surprised to see another 10 percent drop for stocks at some point this year. It would be the third such “correction” since 2015, a sharp turnaround from 2012 through 2014 when there were none.
Swings have become more common for stocks since the Federal Reserve ended its bond-buying stimulus program in October 2014, but they’ve followed a consistent pattern: A quick drop stirs up fear, only for a rally to ensue. The United Kingdom’s vote late last month to leave the European Union was the latest example. The Standard & Poor’s 500 index had one of its worst two-day drops, only to make up nearly all of it in the following three days.
The dip-recovery-dip pattern has been so regular over the last 18 months that the S&P 500 is now almost exactly where it was at the end of 2014.
Among the factors that could send stocks down, and back up, in the short term:
■Earnings are falling, but the bottom may be arriving.
Companies have just closed the books on the second quarter, and analysts say earnings per share across the S&P 500 fell 5 percent from a year earlier. It would be the fourth straight decline in a row, according to S&P Global Market Intelligence.
The sharpest drops are likely to come from energy producers, which are still reeling from the plunge in the price of crude oil. Tech companies and other sectors are also seeing profits weaken amid slow or non-existent revenue growth.
Analysts expect the trend to improve later this year, though. They’re forecasting S&P 500 profits will begin growing again in the third quarter.
■Stocks aren’t cheap.
Stocks in the S&P 500 are trading at about 26 times their average earnings per share over the last 10 years, adjusted for inflation. That’s nearly double the ratio they were trading at when stocks hit bottom in March 2009 following the financial crisis, according to data from Yale University professor Robert Shiller.
One reason for stocks’ popularity is that bonds are offering very little in terms of yield. The 10-year Treasury note’s yield dropped to a record low of 1.32 percent Wednesday.
■The global economy is still shaky.
The freak-out following last month’s “Brexit” vote shows how worried investors are about the global economy. Europe is already struggling, and the fear is that the United Kingdom’s exit will further weaken its economy and those of its continental neighbors.
The world’s second-largest economy, meanwhile, has been one of the market’s largest worries for years. China’s economic growth has slowed sharply, and economists are debating where it will bottom out. More encouragingly, the U.S. economy is expected to continue growing.
■Questions about policy.
Presidential-election years have historically been a struggle for stocks, particularly when there’s no incumbent running. The S&P 500 has had an average 3.3 percent loss in the last year of a president’s second term.
Many lay the blame for that on how investors dislike uncertainty. Fund managers have already begun war-gaming what a Trump presidency could mean for their portfolios. Exporters could be hurt by proposals to limit trade, but they’re unsure about other ramifications.
Investors are also guessing about when the Federal Reserve will raise interest rates again. The central bank raised rates in December for the first time since 2006, but many economists think the next one may not arrive until 2017.