I have spent a fair amount of time the past two days watching football and simultaneously slogging through the expected year-end crush of 2011 outlooks, forecasts, and other crystal ball projections. As a public service I will try and keep this as brief as possible and share what I consider to be the most salient findings.
Our article a few days ago, '"2010 Post-Mortem" commended leading analysts on their going-in "consensus call" on the S&P for 2010, which was 1225. The year closed at 1257.64, roughly a 12.6% increase.
Goldman Sachs' Chief U.S. Investment Strategist, David Kostin, had one of the best calls for 2010, with a going-in forecast of 1250 (however, this was revised downward to 1200 in August, a fact mostly ignored by the media). Goldman's call for 2011 is SPX 1450, about a 15% increase. For more detail on Goldman's 2011 outlook, see TSP's 'Top Story' Goldman Looking For 25% in Stocks Next Year
The consensus 2011 major house analyst forecast is for SPX 1379, almost a 10% increase. Nobody, however, is definitively predicting a straight shot up from Friday's close, with Goldman's investment outlook titled "Easy Money, Hard Market" and another analyst calling it the "Year of the Market Timer" (as if there were any other kind).
If one takes the "average" SPX call of 1379 and the "average" S&P earnings forecast of $92, you can derive a multiple of 15.0. The median P/E multiple since 1956 on the S&P is 16.5, so certainly these optimistic forecasts are well within the realm of reasonable possibility.
However, that said, there are no shortage of bears with very different expectations for 2011. The laundry list of arguments/concerns is fairly well-known and does not need repeating here. Perhaps the most notable and respected less optimistic forecasters are at PIMCO, where they are sticking to their theme of "The New Normal", which has many elements but hinges on lower than historical GDP growth for some time to come and serious concerns over deficits and regulation, among many worry points. Even PIMCO, however, softened its stance in December and became a bit more bullish, forecasting 4th Qtr. 2011 growth at 3.5%, an increase versus lower earlier estimates.
Four statistics in the many year-end summaries I have read especially got my attention and all four could be interpreted as either "glass half full" or "glass half empty":
a) The top-performing 50 stocks in the S&P accounted for 60% of the index gains in 2010. This might be read as plenty of room for under-performers to "catch up" in 2011, especially in the financial sector. Or, it could be read as an "overextended market led by somewhat more speculative higher-beta stocks" which is overdue for a serious correction (although it is a bit hard to call many S&P 500 stocks "speculative", but you get the point).
b) Earnings growth in the 3rd Qtr. 2010 was +31%, but revenue '"only" grew by 8%. The bulls point obviously to the consistently great earnings performances throughout the year, the bears to "just how far can cost-cutting, job-slashing and restructuring carry the day?" and "how low the bar was set in 2010."
c) Trading volume was down -16% from 2009 and -24% from 2008.... meaning tremendous room for trading volume to recover? Or a vulnerable four-month rally driven off light volume, which in itself was driven by HFT trading?
d) According to one analyst, "The economy needs to create 232,400 jobs each month for the next 60 months to get to the employment rate last seen in December 2007, which is highly improbable." So, is there nowhere to go but "up" in terms of employment recovery or is the jobs challenge so great as to continue to act as a drag on economic growth? Similar questions are being asked by many experts on the housing and credit markets.
So, the bull comments are typified by "the path to earnings growth has never been smoother due to strong corporate balance sheets, easy monetary policy and a growing economy" to the bears saying "the good news has all been priced in and all the potential negatives have been ignored...expectations of higher valuations are unrealistic." You can draw your own conclusions and make your own decisions. Personally, I would not be surprised by anything, including an SPX trading range of 1040-1440.
(Note: The highest call I have seen is a test of 2007 highs around 1550-1570, the most bearish call a test of 850, although I think some perma-bears do have it even lower. I do believe if the rally continues directly from here, 1300 will offer normal century mark resistance and then 1335 as the 100% move off of 667 lows in 2009. One Elliot Wave analysis I saw made a fairly interesting technical/visual case for 1275-1280 as the next "top" based on a long-term "descending triangle" off of the 2007 highs, but I am quite sure you could find any number of "compelling" cases out there for just about any upside or downside target you want).
S&P 500 - Last 5 Years
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Comments
You write good, objective articles. Technically the market has broken out solidly to the upside and barring some unforseen catastrophe it appears unlikely the S&P will drop below 1200-1220. This is a major area of support and resistance starting in 1998 so if the market dips to that level I suspect the HFT's will be piling in on the long side.
I would expect the gains we had in september are the gains for the next 3 months in advance. Then the market buyers will decide to continue another leg up or correct. Surely nothing will be based on US economic progress which is permanently dogged so we will see how things are elsewhere and then decide.
Great Report, but I think in General there is too much bullish sentiment out there, the VIX is at extreme lows.... we will go down quite some before we move much higher .....
If you believe in Pivot Points, the Yearly pivot (H+L+C)/3 for the SP500 for 2011 is 1177, which is just slightly beneath the low for December 2010. Usually there is a high probability that this pivot will be hit sometime during the new year.
Great comments one and all... thank you for taking the time to offer your thoughts! And yes, pivots points do seem to act like magnets. I also remain concerned about the "one-way street" we're seeing... can't last forever, right?
As for goldmans call +/- 50 pts thats pretty close. For whatever reason it seems I've been on the bear blogs the last 2 years and got nowhere.
Nice report on how the investor community sees 2011 to be. I see more bullish pattern than bearish even if the recovery continues at slower than anticipated pace and the job report continue to show improvement. There is higher probability that the bullish predictions will be met.