NEW YORK (Reuters) – The 4.5 percent drop in the benchmark S&P 500 over the last five days has not dented strategists’ expectations for mild to moderate gains in the U.S. 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 U.S. 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 percent, 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 that 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 nine-year-long Wall Street bull market.
Mona Mahajan, U.S. investment strategist at Allianz Global Investors in New York, still expects the S&P 500 to reach roughly 3,000 by the end of 2018, an approximately 11 percent gain from its current level, she said.
“We felt markets had gone up too fast. It didn’t seem sustainable. We feel it was healthy to take a breather and reset,” she said, adding that financial and defense companies in particular could move higher once the sell-off is over.
Fourth-quarter earnings in the S&P 500 are expected to grow 14 percent, according to Thomson Reuters estimates. Of the 275 companies in the S&P 500 that have reported their results, 77.8 percent posted earnings above analyst expectations, a rate approximately 13 percent higher than the historical average.
“The fact is that the economy seems to be heating up,” said Brian Nick, chief investment strategist at Nuveen. “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 that the decline in stocks was overdue after 2017, a year that saw the S&P 500 jump 19 percent, and may continue despite the nearly 2 percent gain in the index on Tuesday. The S&P 500 is now up 0.8 percent for the year, after hitting a high of 2,872.87 on Jan 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 yesterday,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas.
Peter Tuz, president of Chase Investment Counsel, was the lone strategist to cut his forecasts. He now sees the S&P 500 ending around 2909 for the year, below his previous target for 3,000.
“We have higher earnings due a lot to new tax rates, but a lower multiple,” he said.
Reporting by David Randall, Sinead Carew in New York, Noel Randewich in San Francisco; Editing by Alden Bentley and Cynthia Osterman