'The bull is limping' — Wall Street analysts have started cutting their stock market outlooks

Markets Reporter
Yahoo Finance

Wall Street is souring a bit on the choppy U.S. stock market.

In a note to clients published Tuesday, Lori Calvasina, head of U.S. equity strategy at RBC, cut her year-end price target on the S&P 500 to 2,890 from 3,000.

“The bull is limping,” Calvasina said, “but still moving forward.”

In cutting her outlook for the stock market, Calvasina cited, among other factors, the impact that rising interest rates and inflation will have on corporate margins and the chances for multiple expansion — that is, rising price-to-earnings ratios — in a rising rate environment.

“A reduction in our EBIT margin assumptions drives the change in our EPS estimate, while our new EPS forecast, new valuation assumptions and our belief that the backdrop for equities has eroded (but hasn’t flipped negative) account for the reduction in our price target,” Calvasina writes.

Notably, RBC’s view on margins being flat in 2018 instead of improving is due to wage pressures, which are expected to impact corporate bottom lines. A notable increase in wages is seen by many economists as a sign that inflation pressures could be rising in the economy.

“With today’s S&P adjustments, we are signaling that we are still constructive on stocks on a 6-12 month view, but that our enthusiasm is a notch lower than where we were to start the year,” Calvasina adds.

“Our targets are driven by the math, but they do sync up with our view on where markets are headed. We expect 2018 to be a good year, but believe returns will be less robust than those seen 2017.”

RBC’s new target implies stocks will gain 8.1% in 2018. With stocks surging higher in early Tuesday trading, the index had pared its year-to-date losses to about 0.5%.

At the outset of 2018, Wall Street analysts were almost uniformly bullish, with some firms increasing their year-end price targets after the passage of tax reform made strong earnings growth in 2018 a certainty. According to data from Bloomberg, the median Wall Street forecast remains for the index to hit 3,000 by year-end.

Spanish bullfighter Cayetano Rivera performs a pass to a bull during a “Corrida Goyesca” bullfight in Ronda, southern Spain, September 2, 2017. REUTERS/Jon Nazca
Spanish bullfighter Cayetano Rivera performs a pass to a bull during a “Corrida Goyesca” bullfight in Ronda, southern Spain, September 2, 2017. REUTERS/Jon Nazca

After 2017 was a year in which markets were historically calm, the S&P 500 has averaged a daily move of more than 1% over the last 40 trading and yet was trading within 1 point of where it sat some eight weeks ago, according to Bespoke Investment Group. In other words, stocks are moving a lot and going nowhere, perhaps the most frustrating outcome for investors.

And now with at least one Wall Street strategist refining their bullish view on the stock market this year, the future of investor sentiment appears less assuredly bullish than it did just a few moths ago.

Meanwhile, first quarter earnings season is set to get underway this week and show that both a strong economy and the benefits of tax cuts will see profits grow by double-digits. Calvasina expects earnings will grow 14% over the prior year in 2018.

Jonathan Golub and the equity strategy team at Credit Suisse said first quarter earnings are likely to grow 15.5% over the prior year excluding the benefits from tax reform. Including assumed tax benefits, consensus expectations for earnings per share in the first quarter are calling for an 18.3% increase over last year.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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