Wary optimism, not great expectations, pinpoints the outlook for stocks in 2015, top equity strategists told our sister site, ThinkAdvisor, in interviews last week.
Next year — the third in the U.S. Presidential Election-Year Cycle and historically a strong one for stocks — is pegged as a continuation of the long bull market, though a handful of significant emerging shifts could make the ride less than smooth.
"There are lots of big, pivotal changes in terms of the direction of various indicators," says Savita Subramanian, head of U.S. equity strategy at Bank of America Merrill Lynch. "We have the first Fed tightening in nine years, OPEC's behavior that effectively signaled they're playing a long game of not cutting oil production — arguably, to stem the U.S. shale story; and a stronger U.S. dollar."
Against the background of what they anticipate to be an extended pickup in the U.S. economic recovery, the experts are forecasting a wide variance in total return, ranging from a low of minus-5 percent, predicted by one strategist, up to 12 percent or slightly higher by another.
Large cap stocks are the place to be next year, all agree; and on the heels of the S&P 500's record high set this year, in 2015 the index could rise to 2200, they predict.
Upcoming meaningful changes call for scuttling what has become a significant trend to short-term-focus investing; instead, the strategists urge a more advantageous long-term view.
Here are highlights from conversations with John Buckingham, CIO, Al Frank Asset Management; Ben Inker, co-head of GMO's asset allocation team; Savita Subramanian; and Scott Wren, senior equity strategist, Wells Fargo Advisors.
1. Overall equity outlook
John Buckingham: "The average stock will do better than the average index. As soldiers have done better than the generals over the long run, I expect a reversion to the mean. Total return: 10 percent -12 percent, or even a little higher."
Scott Wren: "Bullish, but not wildly bullish. Total return: 6 percent-10 percent. Not bad."
Savita Subramanian: "A good year, though maybe not as great as the last three: we're at the end of liquidity-driven market returns. But this year could be one of the best stock-picking hunting grounds in a while if you have a long-term time horizon and are able to weather a little volatility. Total return: 8 percent — a decent amount of upside from here."
Ben Inker: "From a valuation perspective, it's hard to be excited about much, with the possible exception of emerging markets. U.S. stocks look pretty expensive. A decent year economically isn't enough to justify much return out of them. Total return: somewhere between minus-5 percent to 5 percent. [I'm not] pounding the table that next year will be a blood bath or that it will be another 2013 either, where the market zooms higher."
2. Interest rates
Wren: "Once the Fed gets going, the road is going to be bumpy, though we probably won't see much of that till 2016."
Subramanian: "A modest rise, with the Fed tightening in September. Rates are going from low to less low, so yield will be an important part of the investor's decision."
Buckingham: "The Fed and central bankers worldwide are likely to remain accommodative for longer than people had thought — rates could actually go lower depending on the economy."
Inker: "Short rates have to start going up – unless the economy takes a turn for the worse."
3. Effect of QE's end
Subramanian: "Last October we came off the IV. A little of the volatility we're seeing now may be driven by that. The Fed's tightening will be a big break from the hyper-easy monetary policy."
Wren: "There's a lot of money sloshing around in the system. But you can't put a gun to somebody's head: 'We want you to borrow money and to spend it!'"
4. Earnings
Buckingham: "Healthy — the caveat being the global economic climate."
Inker: "Earnings will have a hard time growing. We have one significant [headwind], the strength of the dollar, which will particularly hit the large-cap space."
Wren: "Growth of 6 percent or 7 percent. Good, not great."
Subramanian: "Five percent growth, a downtick from this year. The hit to earnings might be lower-cost oil than was originally anticipated – a negative to S&P 500 earnings."
5. Volatility
Wren: "Any volatility will come from bad print on Chinese GDP or bad European data or big supply disruptions, like Saudi Arabia cuts their supply in half."
Subramanian: "The transition from a three-decades-long regime of falling interest rates could be accompanied by pronounced volatility."
6. GDP
Inker: "Growth of 2 percent or 2-1/4 percent should be enough to cause unemployment to fall from 5.8 percent to 5 percent. Growth may not be a lot better than okay. If wages go up as a percent of GDP, profits will go down as a percentage."
