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Archive for Friday, December 23, 2011

Pros see stocks up in 2012, but risks, too

December 23, 2011

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— The good news is that Wall Street experts think stock prices will rise more than 10 percent next year. The bad news is that they expected big gains in 2011 and got nearly zero instead.

It’s forecasting time on Wall Street, and once again the pros are trying to predict the unpredictable. History suggests their target price for stocks by the end of 2012 will prove too high or too low. They might even get the direction wrong — predicting a gain when there’s a loss.

As Yogi Berra said, “It’s tough to make predictions, especially about the future.”

In typical times, guessing where stocks will end up in a year is difficult. There are many assumptions about economic growth, inflation and consumer spending that go into the calculation.

Now, forecasting has become nearly impossible. Big unknowns hang over the market as rarely before. Will the euro break up? Will China slow too sharply? Will squabbling in Washington scuttle the economic recovery?

“Normally, you wonder, How will sales do? How are managements doing?” says Howard Silverblatt, senior index analyst at Standard & Poor’s, which puts out its own forecasts. “Now there are so many high-level issues that affect the market.”

Silverblatt’s firm says the S&P 500 index should rise to 1,400 by the end of 2012, up more than 10 percent from Friday’s close of 1,265. That figure is an average of expectations from investment strategists, economists and other big thinkers. More bullish yet are stock analysts focused on individual companies. Add up their price targets for each stock in the index, and they see it rising to 1,457, up 15 percent.

There’s plenty of reason to think stocks will rise fast in the coming year. U.S. companies are generating record profits. Americans are spending more than expected and factories are producing more. The job market finally appears to be healing, too.

The odds of the U.S. slipping into another recession have fallen since the summer, when the economy had slowed.

Stocks seem attractively priced, too. The S&P 500 is trading at 12 times its expected earnings per share for 2012. It typically trades at 15 times, meaning stocks appear cheaper now.

Binky Chadha, chief strategist at Deutsche Bank, says the S&P 500 could hit 1,500 by the end of 2012, a gain of more than 18 percent.

Still, there is worry amid the bullishness.

Michael Hartnett, chief global equity strategist at Bank of America-Merrill Lynch, expects the S&P to close next year at 1,350, up 6.7 percent from Friday’s close. He thinks the U.S. will avoid recession and U.S. companies will generate decent profits.

What could wreck that prediction is a worse situation in Europe than he is expecting. If European leaders move too slowly to solve their government debt crisis, the region could fall into a deep recession and throw the U.S. into one, too. If Europe tanks, profits will drop sharply and push the S&P down to 1,000, he says. That would be a sharp drop of 21 percent from Friday’s close.

The frightening part is that Hartnett gives this “bear” case four-in-10 odds.

Similarly, Barry Knapp, strategist at Barclays Capital, predicts the S&P will rise to 1,330 next year. But he expects Europe’s struggles with its debt and Washington gridlock could lead investors to sell before they buy. He says the S&P could fall to 1,150 by the middle of the year before rising to his target.

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