While aggregate S&P 500 earnings disappointed in 2015, with little to no growth, strategists seem to be shifting from the challenges of this year to a slightly positive view for next year.
Many are saying that modestly positive earnings per share growth appears achievable.
1. S&P 500 Keeps Climbing
BofA Merrill Lynch Global Research predicts the Standard & Poor’s 500-stock index to rise about 5%. Merrill’s year-end target is 2,200, up from about 2,100 now. In 10 years, Merrill sees the S&P hitting 3,500.
“Credit-sensitive investments are 2016’s biggest risks, in our view,” the firm states. “In contrast, the Standard & Poor’s 500 is the ultimate anti-credit play. It’s filled with large, liquid companies that have healthy balance sheets and above-average cash balances. We expect the S&P 500 to continue climbing next year.”
Wells Fargo sees the S&P rising even further, with a target of 2,230 to 2,330.
2. Expect Modest Earnings Growth
Strategists predict varying degrees of positivity in the New Year.
UBS expects 8% to 9% earnings growth in 2016 – predicting that the U.S. economy will “gain some momentum” as the headwinds for lower energy and the strong dollar fade.
Meanwhile, Wells Fargo sees “roughly a 6% or 7% increase” in the S&P 500 index operating earnings for 2016, projecting $130 in operating earnings per share, up from about $122 per share in 2015.
“That growth is most likely to be led by the consumer discretionary and technology sectors of the economy,” the bank says in its outlook.
While Rob Sharpes of T. Rowe Price acknowledges that “consensus estimates have projected 9% year-over-year growth in earnings per share for the companies in the S&P 500 index in 2016,” he thinks this is probably too high, given the profit recessions in energy, materials and related industries.
“Earnings growth in the mid-single digits seems attainable, assuming (as we do) that consumer spending remains robust,” he said in T. Rowe Price’s outlook. “At 15 times forward earnings, the S&P 500 appears neither expensive nor inexpensive on a historical basis, although it could be argued that U.S. equity valuations are still attractive in a context of low inflation and low interest rates.”