Why Wall Street's Bulls May Slash S&P 500 Targets Even Further

Investment strategists at leading financial firms tend to be bullish, so it is noteworthy when they shave their forecasts and issue cautious comments on the direction of the market. Credit Suisse, Citigroup, Barclays Capital and BMO Capital Markets are among those firms that recently reduced their 2019 targets for the S&P 500 Index (SPX).

"Our base case remains that equities returns will be positive for 2019, although we now a more limited upside," is the view of Maneesh Deshpande, head of U.S. equity strategy & global equity derivatives strategy research at Barclays Capital, per a note to clients quoted by CNBC. The table below presents performance figures for the S&P 500 in recent periods.

• YTD 2019: +3.6%
• Dec. 2018: -9.2%
• 4Q 2018: -14.0%
• Full Year 2018: -6.2%
• Last 10 Years: +191.6%

Source: Yahoo Finance; data through the close on Jan. 10, 2019.

The decision by Apple Inc. (AAPL) to slash its revenue projection for the quarter that ended on Dec. 31, 2018 has sent shockwaves through the market, "raising anxieties that other companies could follow suit," as The Wall Street Journal puts it. Continued trade tensions between the U.S. and China were a factor in Apple's announcement, and the ramifications for other companies appear to be growing, the Journal suggests.

While earnings growth for the S&P 500 is on track to be better than 20% in 2018, consensus estimates from stock analysts are calling for a sharp deceleration to 7.7% growth in 2019. Bloomberg reports. Much of the growth in 2018 was the one-time impact of corporate tax reform. Current stock market prices, meanwhile, are anticipating average annual earnings growth of just 3.7% through 2023, according to a model used by Goldman Sachs, Bloomberg adds.

One reason for recent cuts in S&P 500 forecasts is that many previous projections were released before the stock market plunge in December 2018, the worst monthly drop since 2009, the Journal notes. The table below lists some of these revisions. The index closed at 2,596.64 on Jan. 10, 2019.

• Jonathan Golub, Credit Suisse: from 3,350 to 2,925 (-12.7%)
• Tobias Levkovich, Citigroup: from 3,100 to 2,850 (-8.1%)
• Maneesh Deshpande, Barclays Capital: from 3,000 to 2,750 (-8.3%)
• Brian Belski, BMO Capital Markets: from 3,150 to 3,000 (-4.8%)

Sources: The Wall Street Journal, CNBC

While stock market valuations, as measured by the forward P/E ratio on the S&P 500, have fallen since the start of 2018, CAPE ratio analysis indicates that the S&P is still more highly valued than at any other time except prior to the Stock Market Crash of 1929 and during the Dotcom Bubble that peaked in 2000, per Fortune magazine. The same article notes that competitive pressures give most companies very limited ability, if any, to increase profits by raising prices faster than the general rate of inflation.

Concerns about rising inflation and future interest rate hikes by the Federal Reserve are among the factors weighing on the markets. In a positive development for stocks, the minutes of the Fed's December meeting indicate that it can "afford to be patient about further policy firming" in 2019, per CNBC. However, the increasing borrowing needs of the U.S. federal government are pushing rates upward. The U.S. Bureau of Labor Statistics, meanwhile, is scheduled to release Consumer Price Index (CPI) data from December 2018 on Friday, Jan. 11, 2019.

All indicators suggest that profit growth is on a downtrend, and this will limit the potential for stock market gains. A trade deal with China probably would produce a market bounce, and remove a major cause of uncertainty, but is unlikely to reverse the profit downtrend.