Despite bullish calls for 2016, several Wall Street strategists are cutting down their forecasts on S&P 500 stocks. Right from slowdown in China's economy, sluggish commodity markets, lower oil price and interest rates are leaving financial markets into a state of uncertainty. The gap between highest and lowest forecast has been alarmingly widening.
For the first time since the Iraq war in 2003, Wall Street strategists lowered their forecasts less than the average annual estimate for S&P 500 stocks. Seven banks have reduced their targets in earliest capitulation since 2003. The divergence in estimates leads to more confusion and trepidation among investors.
The S&P 500 index fell eight percent this year so far. Within five weeks into 2016 year, seven of 21 strategists in a latest survey by Bloomberg cut down their predictions for Standard & Poor's (S&P) 500 index stocks. The latest forecast for S&P 500 ending 2016 at 2,175. This is 16 percent higher than last week's closing. The strategists in the survey done in November 2015 made a forecast for 2016 S&P 500 at 2,245.
Citigroup Inc's chief US equity strategist Tobias Levkovich forecasts S&P 500 at 1,870, 0.5 percent less than the current level of the index. S&P500 index reached 1,859.33 points lowest in 20156 on 20 January. If investors remain concerned about the Chinese economy growth, the S&P 500 index may touch another low as there's high correlation of stocks and oil.
The oil price fell 50 percent since June 2015 and S&P500 index suffered eight percent losses in 2016 so far. Strategists attribute the reason for the market crash to more divergence among forecasters, which is indicating looming uncertainty in the market. Equity strategists are facing a challenging situation in forecasting two major factors --China and oil, as reported by Newsmax Finance.
The market crash has eroded over $2 trillion equities' value. The selloff in bank stocks and volatile oil prices have become causes of concern for the Wall Street. Earnings of S&P 500 companies are forecast to drop 4.5 percent for the fourth quarter of 2015.
Indicating highest spread since 2012, the difference of highest and lowest forecasts reached to 325 points. The surprising and unexpected movements in the stock markets amid bullish forecasts for 2016 are adding to the worries. The 2016 so far has been worst beginning of any year since 2008.
International Business Times reports that the Chinese economy continues to reel under slowdown pressure pulling GDP growth rate lower. The labor unrest and lower GDP growth rate are causing uncertainty across the country. China's economy growth rate at 6.9 percent in January 2016 indicated 25-year low.
Michael Purves, chief global strategist at Weeden & Co in Greenwich, Connecticut. said: "We obviously need earnings growth, but that's oil-dependent, and China is a huge sentiment factor and a global growth contributor. Central banks can take the edge off a little bit but they can't directly address the two."
The China's economy slowdown is spilling into the global economy. Corporate firms with low credit quality are suffering the most in S&P500 capping the growth in quarterly earnings. Corporate quarterly numbers couldn't boost the markets. Several S&P 500 companies registered slowdown in their profits for third quarter.
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