Strategists still see gains in US stocks despite sell-off

NEW YORK (Reuters) – The 4.5% drop in the benchmark S&P 500 over the last five days has not dented strategists’ expectations for mild to moderate gains in the US stock market by the end of the year, with corporate earnings and interest rates not expected to derail equities.

Only one of the more than 10 US equity strategists contacted by Reuters on Tuesday has lowered their year-end target for the S&P 500. The S&P 500 rose 1.7% to 2,695 on Tuesday, one day after posting its largest one-day loss in more than six years.

Despite the steep declines in the stock market, strategists say they remain optimistic that the sell-off does not reflect underlying weakness in corporate earnings or signal that the rise in interest rates will accelerate and derail the nineyear-long Wall Street bull market.

Mona Mahajan, an investment strategist at Allianz Global Investors in New York, expects the S&P 500 to reach roughly 3,000 by the end of 2018, an approximately 11% gain from its current level.

“We felt markets had gone up too fast,” she said. “It didn’t seem sustainable. We feel it was healthy to take a breather and reset.” Financial and defense companies in particular could move higher once the sell-off is over, she added.

Fourth-quarter earnings in the S&P 500 are expected to grow 14%, according to Thomson Reuters estimates. Of the 275 companies in the S&P 500 that have reported their results, 77.8% posted earnings above analyst expectations, a rate approximately 13% higher than the historical average.

“The fact is that the economy seems to be heating up,” Nuveen chief investment strategist Brian Nick said. “Right now the market is over-interpreting that the Fed is going to go too far too quickly to combat early signs of inflation. The tax cuts may heat up the economy more than the Fed anticipated, but I don’t think that’s a problem for this year.”

Strategists said the decline in stocks was overdue after 2017, a year that saw the S&P 500 jump 19%, and may continue despite the nearly 2% gain in the index on Tuesday. The S&P 500 is now up 0.8% for the year after hitting a high of 2,872.87 on January 26.

“I think the market is going have its confidence restored only when we have a successful retest of the low that was put in [on Monday],” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas.

Chase Investment Counsel president Peter Tuz was the lone strategist to cut his forecasts. He now sees the S&P 500 ending around 2,909 for the year, below his previous target of 3,000.