If previous bull-market cycles are a sign of what’s to come in 2011, then the U.S. equity market’s upward bias is likely to continue, with the Standard & Poor’s 500 Index reaching a 12-month target of 1,400, said Sam Stovall, S&P managing director and chief investment strategist, in an investment outlook on Tuesday.
Stovall’s recommended a neutral portfolio allocation, with 60% in equities and 40% in fixed income, and his focus was on large-cap value stocks with a slight bias toward the cyclical sector.
In his outlook presented during S&P’s “Emerging Prosperity and Continuing Risks in 2011,” Stovall laid out expected operating EPS growth for the year, saying that it should be positive for all sectors. He anticipates that the top-three performing sectors will be Materials, at 37% growth for the full year, Energy, at 26%, and Financials, at 24%.
Consumer Discretionary, Consumer Staples and Industrials are all expected to show 15% full-year growth, while Information Technology is seen at 9% and Healthcare is seen at 4%.
Looking at average performances for the S&P 500 Index during a president’s third year in office, Stovall (left) said full-year growth was 17.1% with a 94% frequency of advance. But since 1949, average large-cap and small-cap stock returns tend to drop precipitously in the third year of a bull market, to 2% in year three from 23% in year three for small caps, and to 5% from 19% for large caps.
The second bull year will end in June, with U.S. gross domestic product at a modest 3.1%, and from there GDP will drop, Stovall predicted.
“We see only a 2.5% rise in GDP in year three as the government pulls back from its quantitative easing program,” Stovall said. “We don’t believe QE3 will follow QE2.”
Globally, GDP recovery projected by S&P for the rest of 2011 shows estimated world growth at 3.7%, Asian growth excluding Japan at 7.1%, emerging markets growth at 6.4%, Latin American growth at 4.6%, Eurozone growth at 1.5% and Japan at 1.2%.
Turning to the overall U.S. economy, Stovall said he expects slow but steady growth:
- There will be no double-dip recession
- Consumer spending will continue to recover slowly
- Unemployment will decline sluggishly over the coming year
- Inflation will be muted due to the jobless recovery
- The Federal Reserve will hold off on raising rates until early 2012
“We have seen jobless recoveries before and have worked our way through them,” Stovall said. “Consumers won’t buy cars or houses, but they’ll go out to dinner more.”
Read ‘S&P Picks 3 Best Large-Cap Value Funds for 2011 Outperformance‘ at AdvisorOne.com.