Wells Fargo cut estimates for stocks next year on concern the Federal Reserve is making a policy mistake that will throttle economic growth.
Chris Harvey, head of equity strategy at the bank, cut his year-end target for the S&P 500 Index to 2,665 from 3,079. While the new forecast represents a 10 percent gain from current levels, he replaced Michael Purves at Weeden & Co. as the biggest equity bear among strategists tracked by Bloomberg.
The reduction came after U.S. stocks plummeted following remarks from Fed Chairman Jerome Powell in which he downplayed the recent market turbulence and said the central bank doesn’t plan to alter efforts to reduce its balance sheet. Policy makers increased borrowing costs for the fourth time this year, defying pressure from President Donald Trump, while dialing back projections for interest rates and economic growth in 2019.
“The message from the equity market seems to be that the Fed has committed a significant policy mistake and we wouldn’t disagree,” Harvey wrote in a note to clients Friday. “The die has been cast and the odds of an accelerated slowdown have just increased.”
A less dovish Fed means lower equity valuations and possibly a worsening economy, according to Harvey. He slashed the 2019 earnings estimate to $166 a share from $173 and said investors are likely to demand a 2 percent premium in earnings yields relative to bond payouts as interest rates go up. The so-called equity risk premium was at 1.4 percent previously.
Harvey joins a growing chorus of professional forecasters turning less optimistic as their predictions are steamrolled by a worsening equity slump. Three other strategists have recently reduced their year-end targets for the S&P 500, including Barry Bannister at Stifel Nicolaus, Jonathan Golub at Credit Suisse and Sanford C Bernstein’s Noah Weisberger.
The S&P 500 fell 2.1 percent to 2416.58 on Friday. Down 18 percent from its record high in September, the index is heading for its worst quarter since the 2008 global financial crisis.
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