U.S. stocks will rise about 10 percent next year from Friday’s close, led by gains in banks and technology companies as the market recovers from its August rout, Wall Street strategists told Barron’s.
A strong dollar, tumbling commodity prices and global economic stagnation will constrain earnings growth, according to strategists surveyed in Barron’s “Outlook 2016” story in the magazine’s Dec. 14 issue.
Respondents were bearish on utilities, metals and mining shares, while they split evenly on their outlooks for energy stocks. Their favorite industries included technology and financials.
Stocks have slid this month as the commodity selloff dims the prospects for a global recovery and revives deflation concerns. The benchmark Standard & Poor’s 500 Index dropped 3.8 percent this week. It’s up 7.8 percent from a 10-month low in August.
David Kostin, chief U.S. equity strategist for Goldman Sachs Group Inc., told Barron’s the market is underestimating the number of rate hikes in 2016. Goldman predicts four increases next year, bringing the Fed’s interest-rate target for overnight loans between banks to 1.25 percent to 1.5 percent.
Higher interest rates and slow economic growth will offset a rise in earnings, Kostin said. His stock picks for next year include Visa Inc. and Google parent Alphabet Inc.
A stronger dollar is one of the biggest risks facing the market in 2016, Dubravko Lakos-Bujas, chief U.S. equity strategist at JPMorgan Chase & Co., told Barron’s. A 5 percent to 6 percent change in the dollar’s trade-weighted average price is roughly equal to a 3 percent change in earnings per share over the next 12 months, he said.
Banks are cheap compared with other sectors and are a good hedge against the risk that the Fed will raise rates more rapidly than predicted, Lakos-Bujas said.
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Corp., said investors should favor value stocks such as Walt Disney Co. and 3M Co., according to Barron’s. Since 1930, such companies have outperformed when annual earnings growth for the market reaches 5 percent or more, she said.
The fed funds rate will climb to 1 percent by the end of 2016, and the Fed will eventually stop at 3 percent, Stephen Auth, chief investment officer at Federated Investors Inc., told Barron’s. S&P 500 earnings growth may rise by 15 percent or more in 2016 as the economy improves, he said.
Avago Technologies Ltd., which makes semiconductor chips for wireless devices, is poised to rise next year as the smartphone market expands, according to Auth. Heath-care companies, including Gilead Sciences Inc., offer long-term growth, he said.
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