Two years of stocks going straight up have chased just about every skeptic from the U.S. market.
Among professional forecasters on Wall Street, none tracked by Bloomberg sees a retreat in 2015, with the average estimate calling for an 8.1% advance. At the same time, buyers of exchange-traded funds ended an obsession with bonds last quarter, sending four times as much cash to U.S. shares.
Pessimism, the constant companion of a bull market poised to become the second-longest since the Kennedy administration, is suddenly nowhere to be found after the Standard & Poor's 500 Index climbed 44% since 2012. While strategists are predicting a rally that would rank as the smallest in four years, the threat of higher interest rates and weakening prospects for global growth aren't creating any full-blown bears after the U.S. beat all but four of the largest developed markets in 2014.
“It's hard not to be long,” Dubravko Lakos-Bujas, the New York-based head of U.S. equity and quantitative strategy at JPMorgan Chase & Co., said. “We remain cautious because of the outstanding risks with global growth and changes in monetary policy. And the fact that everybody is long is reason for a bit of concern.”
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Wall Street strategists have underestimated the bull market since 2011 as the S&P 500 posted gains of at least 10% for three straight years, the longest stretch since the late 1990s. The benchmark index for American equity has risen in 20 of the last 26 months and never fell more than three days in a row in 2014.
UNANIMOUSLY BULLISH
Following a year in which analysts predicted an advance that ended up being half as big as the index's actual return, they're now calling for a 166-point jump to 2,225 in 2015, according to the average estimate of 18 tracked by Bloomberg. It's the first time strategists have been unanimously bullish since 2009, when stocks surged 23%.
Should the forecasts come true, the bull market would surpass the 2,248-day advance that occurred from 1974 to 1980 and trail only the 1990-1998 rally, which lasted 2,836 days, data compiled by Bloomberg and Birinyi Associates Inc. since the 1960s show.
Tony Dwyer of Canaccord Genuity Securities is the most bullish strategist, saying the S&P 500 will climb to 2,340 by December. Barclays Plc's Jonathan Glionna and Goldman Sachs Group Inc.'s David Kostin are tied as the least optimistic at 2,100. The spread between the highest and lowest forecast is 11%, the smallest since 2007.
FEEL FOOLISH
“The market will again make people feel foolish, whether it's going to be something like good, double-digit returns, or negative returns,” David James, director of research at Alpha, Ohio-based James Investment Research Inc., which oversees $6 billion, said. “When there is overall consensus, that's really when people need to be concerned the market is going to do something different.”
Investors are favoring stocks over bonds more than any time in a decade after shunning equities. About $91 billion was attracted to U.S. equity ETFs during the fourth quarter, compared with $23 billion inflows to fixed income. The gap was the biggest since Bloomberg began compiling the data in 2000.
Stock buying is accelerating amid expectations that economic growth will pick up and the Federal Reserve will raise interest rates in 2015. Money flowing to equity ETFs from October to December almost doubled from a year earlier, hitting a record, and was six times the average in the first three quarters of 2014.
“As investors become more comfortable with equities, they're going to transition from ETFs to more actively traded products to get better returns,” Brian Belski, New York-based chief investment strategist at BMO Capital Markets Corp., said.
Investors using ETFs to buy industries instead of individual stocks have narrowed the difference in price movements between equities and sectors, said JPMorgan's Lakos-Bujas. Money managers were less successful finding winners in 2014, with eight of 10 funds focusing on large growth stocks trailing their benchmarks, according to data compiled by Chicago-based Morningstar Inc. as of mid-December.
SHIFTING PHASES
“We're shifting phases of the bull market,” Dan Greenhaus, the New York-based chief strategist at BTIG, said. “The second phase was a fairly low-volatility march higher characterized by a high rate of return and outperformance of the riskier parts of the market. The next phase should be higher volatility, a bigger dispersion of returns, higher credit spreads and a riskier environment.”
Strategists entered 2014 with an average forecast for the S&P 500 to finish at 1,946, more than 100 points below its Dec. 31 close. Barry Bannister at Stifel Nicolaus & Co. was the most bearish, projecting the index would slip to 1,750. It ended up topping all but two of 20 strategists tracked by Bloomberg.
Thomas Lee, formerly of JPMorgan and now managing partner of Fundstrat Global Advisors, was the closest with a 2,075 prediction in December 2013, followed by the 2,100 call from Michael Purves, chief global strategist at Weeden & Co.
“One of the problems with 2014 was that we weren't getting clear economic signals,” Mr. Lee said. “Next year is going to be marked by better economic visibility and it's stemming from the U.S. momentum rally picking up in the jobs market and consumer spending. It's also going to be fueled by the improvements in gasoline.”
U.S. gross domestic product will expand by 3% in 2015, according to the median estimate of economists surveyed by Bloomberg. The economy grew 5% in the third quarter of 2014 as consumer and business spending fueled the biggest expansion in more than a decade.
Consumer spending is poised to grow in 2015 as stronger employment and lower gasoline prices boost household buying power, one reason why the Fed will probably raise interest rates next year.
Stocks declined 3.6% in January 2014 as Fed policy makers cut the pace of bond buying for a second straight meeting amid improvement in the economy. Investors should be wary in the coming year as the Fed moves closer to hiking rates for the first time since 2006, said Luca Paolini of Pictet Asset Management Ltd.
“This would not seem like a bad time to invest,” Mr. Paolini, London-based chief strategist at Pictet, said. “But then you look at valuations, consider that there will be a big change in Fed monetary policy, and it makes you feel like it's better to wait.”
VALUATION CLIMBS
After gaining 11% in 2014, the S&P 500 trades at 18.2 times profit, near the highest level since 2010 and above the average of 16.3 over the past decade. Valuations aren't reliant on a booming economy and will climb in 2015 as company executives rein in expenses and low interest rates spur growth, according to Jonathan Golub, chief market strategist at RBC Capital Markets.
“Stocks don't need some huge GDP number in order to get double-digit returns,” Mr. Golub, who has a price target of 2,325 in 2015, said. “Valuations historically aren't driven by growth, they're driven by cost of capital. Interest rates are extraordinarily low and rising rates will convince investors that things are returning to normal.”
Earnings per share of the companies in the S&P 500 will increase 6.4% in 2015, analysts predict. Consumer-discretionary, technology and raw-materials companies are expected to post the fastest growth, estimates compiled by Bloomberg show.
“The bull market is working harder for the money,” John Stoltzfus, the New York-based chief market strategist at Oppenheimer & Co., said. “When you've been riding a bull market this long, one has to consider how much longer it will run, but we think 2015 might well be one more year when opportunity outweighs risk.”
