As earnings season gets under way, investors are met with conflicting signals.
The lofty returns of last year are but a memory … yet the Dow Jones Industrial Average and S&P 500 have been making new all-time highs, with the S&P 500 targeting the 2000 level. Corporate earnings haven’t kept pace with stock gains … but are expectations too low for the Q2 reporting season?
With that backdrop in place, I asked InvestorPlace‘s expert advisers for their S&P 500 predictions — and they delivered.
If you read on, you’ll find eight takes on the market, as well as S&P 500 predictions for the coming months.
Check out these market outlooks from Richard Band, Charles Sizemore, Hilary Kramer and more:
After Summer Comes the Fall
By Richard Band
Editor, Profitable Investing
Have you sprouted wings yet? With the blue-chip stock indices breaking out to one new all-time high after another (including a fresh record close for the S&P 500 on July 3), lots of investors think they’ve died and gone to heaven.
Indeed, market pullbacks seem to be a thing of the distant, earthly past. It’s been 86 weeks since the S&P last traded below its 200-day average price.
That’s the longest spell without a dip to the 200-day since 1998. It’s also the second-longest run of the past 50 years.
Far be it from me to predict an imminent end to this little paradise. Share prices may well keep climbing a while longer — perhaps to the magic 2000 level on the SPX later this month.
At some point, though, an adverse event will catch Wall Street by surprise, and gravity will take over. The 200-day average was 7.4% below last Thursday’s record S&P close. When it comes, I’ll be looking for a pullback to plunge us at least that far.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.
Caution Is Warranted
By Dan Wiener
Senior Editor, The Independent Adviser for Vanguard Investors
Obviously the markets have been strong, but while we’ve hit a number of record Dow and S&P highs (the Dow crested 17,000 for the first time last week), it hasn’t been a rocket ship. Consider that the last three record highs for the Dow have come on gains of 0.1%, 0.2% and 0.8%. No earth-shattering price eruptions for sure.
Investors are still pretty cautious. I don’t see unbridled optimism abounding. For instance, twice as much money has flowed into domestic bond funds as has flowed into domestic stock funds so far this year.
Investors seem to be putting money to work overseas, primarily in broad foreign stock funds rather than in emerging markets. Europe has been popular. That said, the U.K.’s FTSE index is still a bit less than 2% below the all-time high it hit in 1999, and many Asian markets are well below their highs.
Yes, these kinds of investor money flows can turn on a dime, so it’s hard to know if investors are “bargain” hunting or not. The bigger trend is simply that investors aren’t overdoing it when it comes to domestic stocks. They were big buyers in 2013 when the market was moving up 30%, but their ardor has dialed way back in during 2014.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.
Make Sure Your Portfolio Is Protected
By Jeremy Jones
Editor, Global Investment Strategy
What happens when the current round of money printing ends in autumn? Will stocks return to fair value — as they did when QE1 and QE2 ended — or will the money-printing campaigns in Europe and Japan and the deeply ingrained Fed put (expectation of more stimulus if stock prices fall) continue to prop up the stock market?
We can’t be sure. But based on what the Bank of International Settlements (the central bank to central banks) calls “the puzzling disconnect between the markets’ buoyancy and underlying economic developments,” we can’t rule out a return to fair value when the money-printing ends. Such a move would result in at least a 30% drop in price and a new bear market.
Now, we aren’t forecasting a bear market, but don’t ignore the risk. Savvy investors prepare for the worst and hope for the best.
How do you prepare for the prospect of a bear market? Be sure you have a balanced portfolio and favor dividend payers, which tend to fall less in bear markets than non-dividend payers and stocks that are out of favor.
Jeremy Jones, CFA, is the director of research for Young Research & Publishing and editor of the Global Investment Strategy newsletter, which focuses on global investment opportunities and risks, as well as strategies that allow subscribers to profit and protect capital.
Financial Stocks Will Lead Us Higher
In light of all the chatter about new market highs, the S&P is higher on the year by a not-so-whopping 6.2%. Last year’s torrid 28% gain is still fresh in the minds of many frustrated traders who for the first half of the year were in the midst of a hackfest, with high-beta stocks being crushed and bond-sensitive sectors making new highs — only to see a fresh rotation back into economically sensitive sectors like transportation and legacy tech.
There is no question that many of the smartest minds in the stock-picking business have been off-balance all year … but that all seems to be changing with the confirmation of the improving economy. The landscape is smoothing out in such a fashion that most sectors are now benefiting from the market’s advance instead of what had previously been radical rotation.
Even though interest rates have barely budged, the perception of higher rates down the road has the lackluster financial sector beginning to show some firming up. Keep in mind that this is the second-largest component of the S&P (at 16%, with technology making up 18%). So financials could easily fuel the S&P to 2100 if the sector catches a tailwind on the notion of gradually higher interest rates that pad net interest income and future earnings growth.
A target of 2100 for the S&P may sound lofty, but bear in mind that it only represents another 7% gain from the current 1960 level. I believe this week represents one of market consolidation in which many stocks do some well-deserved backing-and-filling while finding relief from technically overbought conditions. The action is healthy and constructive, and it sets the stage for the next broad market move higher.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
Earnings Season Could Turn Us Downward
By John Jagerson & Wade Hansen
Editors, SlingShot Trader
Now that the Dow Jones Industrial Average has both climbed above and fallen back below 17,000, many traders are asking themselves, “Does the S&P 500 have what it takes to get to 2000?”
It should get there eventually, but we believe it is going to flirt with that level for a while first.
With Alcoa’s (AA) earnings announcement earlier this week, we have unofficially entered earnings season, which means that companies are starting to report how well they fared during the second quarter of 2014. If the initial reports are even just in line with expectations, the S&P 500 will easily be able to continue its trend higher. After all, the uptrend on S&P 500 has been accelerating during the past few months.
Courtesy of MetaStock
However, if the initial reports — especially those from the financial sector — miss expectations, Wall Street is going to start taking some profits off of the table. This is the outcome we believe is most likely.
Such a scenario would prevent the S&P 500 from reaching 2000 in the next few weeks, but it wouldn’t prevent it from doing so later this year.
Now, it’s important to remember the distinction between “taking profits off of the table” that could lead to a bearish pullback, or correction, and “panic selling” that could lead to a bearish downtrend. The underlying trend of the market is still too strong to give sway so easily to a new bearish downtrend, even if we do experience a small bearish pullback.
When trying to determine whether a bullish trend is going to continue or not, it’s always important to remember Newton’s First Law of Motion: an object in motion will remain in motion unless acted upon by an external force. You’ll find the same phenomenon in Dow Theory.
In this case, the S&P 500 is in bullish motion, but quarterly earnings might end up being the external force that could change that motion.
John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.
New to options and need more personal guidance? Try our online options course, “Strategic Investing,” and receive your first two weeks free by clicking here.
Keep on Climbing the Wall of Worry
After a series of all-time highs, there is no shortage of opinions about where the market will go from here. And that’s one reason why I feel it will continue higher in the coming months — that, and the fact stocks remain the most attractive option with interest rates so low. We might go three steps forward and two steps back, but the march upward looks inevitable.
In the near term, I expect earnings to help the S&P 500 reach the magical 2000 level, likely within the next few weeks. Despite all-time highs, earnings expectations are actually on the low side, with analysts looking for just 4% growth. With the bar low, the economy seemingly strengthening and cost structures still low, the stage is set for companies to report surprisingly good results as they rebound from a harsh winter and benefit from pent-up demand.
Even if earnings disappoint and selling picks up, I look for the S&P 500 to ultimately retrace the work of the past six months on its way to steeper peaks. As long as government debt around the world pays such low yields, stocks — especially in the United States — should stay strong as the expectations for capital appreciation and dividend yield remain more attractive than other investment options.
In addition, there are enough concerns for stocks to continue climbing the “wall of worry” — interest rates, inflation, the jobs market, international troubles, and more. It’s when those worries fade that the possibility of a long-overdue correction increases.
Hilary Kramer is the editor of three financial advisory services designed to help individual investors profit from her stock-picking talents — Hilary Kramer’s GameChangers, Breakout Stocks Under $10 and High Octane Trader.
Look Abroad for Bigger Returns
By Charles Sizemore
Editor, Macro Trend Investor
The bull market of 2009 to present is probably the most hated bull market in history. Most bull markets climb a wall of worry; this one has climbed a wall of angst, anger, frustration and at times, white-knuckled fear.
Yet the major U.S. indices hover near all-time highs and major new milestones: The Dow Industrials are just a hair below the 17,000 mark, and the S&P 500 is just a few strong trading days away from cracking 2000.
I have a piece of advice here: Don’t fixate on price milestones like these. They are arbitrary and give little in the way of real information. Focus instead on valuation.
The S&P 500 trades for just shy of 20 times earnings. That’s not “bubble” territory, but it is definitely expensive.
With bond yields and inflation still very low by historical standards, stocks should have a relatively high P/E ratio, all else equal. But unless corporate earnings growth accelerates — which looks somewhat doubtful considering earnings are already at cyclical highs — the U.S. market is priced to produce middling returns.
For lack of other domestic alternatives, I expect U.S. stocks to drift higher from here. But I expect to see far better returns overseas. Europe is still in the very early stages of economic recovery, as are many emerging markets. Valuations are much lower — many European and emerging markets trade at cyclically adjusted price/earnings ratios in the mid-teens or lower. Meanwhile, investors have been overweighed U.S. equities and underweighted emerging market equities for years. I expect this trend to reverse in the second half of 2014.
So, while we’ve had a nice run in U.S. stocks, and while I believe that the markets will finish the year higher, I recommend reducing your exposure to U.S. stocks and increasing your exposure to Europe and emerging markets.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
We’ll Keep on Bumping Higher
Out of all the macro factors that investors are contending with, the most widely discussed, least known and most important is U.S. interest rates — namely, when the rise will begin and at what pace it will continue. I believe interest rates will rise faster and further than most now expect, and that people are likely to change their expectations themselves as the date approaches.
At the moment, expectations are generally lower because investors are more pessimistic about the economy — and because they are misinterpreting the seemingly dovish comments of Fed chair Janet Yellen. So there is likely to be a lot of volatility in equity and bond prices as interest-rate forecasts get hashed out.
But if I am right in expecting the economy to improve at a modest pace, and rates rise at a measured pace right alongside, then any sharp declines in the coming few months are likely to be buying opportunities for contrarian, opportunistic investors … even if, at the time they are occurring, the bears argue that a sharp new downturn is coming.
Summing it all up, I would expect a modestly improving economy to combine with a measured increase in rate expectations to lift stock prices in the second half. My year-end S&P 500 target is 2100, or about 6.5% higher than the current level. If there is a dip under 1800 midway through amid overseas geopolitical-generated volatility, so much the better for traders and investors alike.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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