Citi Is Latest to Predict Modest Stock Gains in 2016

by Kristen Scholer

Citigroup Inc. (C) is the latest bank to predict modest stock returns next year.

In a note to clients this week, Citi’s U.S. equity strategist, Tobias Levkovich, said he sees the S&P 500 (SPX) (SPY) ending 2016 at 2200, 7.2% above where it recently traded at 2052.58. The bank wrote that subdued sentiment and valuations are supportive of equities in the new year. But it warned that profit margins are likely to be under some pressure amid a rising rate environment and “uncertainty” around the presidential election.

Citi adds its name to a growing list of strategists anticipating the large-cap S&P index will finish 2016 at 2200. In the past few weeks, strategists at J.P. Morgan Chase & Co. (JPM), Barclays (BCS) and Bank of America Merrill Lynch (BAC) all predicted a year-end level of 2200 for the S&P 500 next year.

As year-ahead outlooks trickle in, the average call for where stocks will end 2016 among 15 strategists at major firms is 2215, according to data compiled by Birinyi Associates. Since 1928, the shop said the S&P 500 has risen an average 7.5% annually.

A year ago, Mr. Levkovich predicted that the S&P would end 2015 at 2200. But as our E.S. Browning wrote earlier this week, 2015 has largely been a washout for stocks. With stocks likely to face headwinds next year, many strategists are recycling last year’s predictions–or reducing them.

Mr. Levkovich said he expects 2016 to be a “tale of two halves.” He wrote that mid-year, the S&P 500 should reach 2300, even though he doesn’t see it closing out the year that high. “We believe that some better earnings in [the first half] will benefit stock prices that have been held back by poor results out of the Energy sector and negative [foreign exchange] translation effects.”

Of course, the presidential election comes in the second half of the year and the Fed could have executed several more rate rises by then—factors Mr. Levkovich said cloud the outlook for equities.

If bond yields move higher, which typically happens when the economy improves and as the Fed ups rates, history would suggest a transition to value stocks from growth names, per Citi.

“In addition, we do see the continued shift to large caps from small caps next year,” the bank said. This year, the Russell 2000 is down 5.7%, versus a loss of 0.3% for the S&P 500.

Citi said risks to its outlook include Chinese growth (or lack thereof), widening credit spreads and geopolitics.

Courtesy of wsj.com