Outlook 2015: Seventh Year Stretch (Part 1)

A good year has followed a great one: In 2013, the S&P 500 gained nearly 30% in price, saw all 10 sectors rise in price, and had 95% of its sub-industries record positive returns. As a result, many investors thought that stocks would surely suffer from such ebullience in 2014. However, history indicated that good years tend to follow great years, as the S&P 500 rose an average 10% in the 18 years following gains of 20% or more since WWII, versus the typical advance of 8.8% for all years. In addition, the S&P 500 recorded positive returns nearly 80% of the time following great years, versus the more normal 71%. What about the year after that? History adds that the 2nd year after great years aren’t bad either, rising an average 6.3% and advancing 61% of the time. Granted, there is no guarantee that what worked in the past will work again in the future. But what kind of year does S&P Capital IQ think it will be? Below is the first half of a summary of things we predict for the coming year.

  • S&P 500 12-month target of 2250: S&P Capital IQ’s Investment Policy Committee sees the S&P 500 rising to 2250 by the end of 2015, based on an 8.6% rise in EPS and still-moderate inflation, though the prospects for higher rates should restrain P/E expansion. Despite the claim that valuations are stretched at 17.7X 2014E EPS, or a 1.4% premium to the quarter-century median P/E ratio, we think they are neither compelling nor off-putting.
  • Solid performances during the third years of the presidential cycle: Since 1945, the S&P 500 gained an average 15% during the third year of the presidential cycle, and rose in price 88% of the time. In the 12-months (October to October) surrounding mid-term elections, the S&P 500 rose in price 17 of 17 times, gaining an average 17.5%.
  • A stock-market correction still looms: The S&P 500 has gone 38 months without a decline of 10% or more, versus an average of 18 months since WWII (and a median of 12 months). In addition, the S&P 500 endured 30 declines of 5% or more during third years of the presidential cycle, yet still recorded above-average full-year price gains.

The U.S. economy is projected to grow 3.0%: Following sub-3% growth rates in every calendar year since the Great Recession ended in 2009, S&P Economics projects the U.S. economy to grow 3% in 2015, benefiting from crude oil that averages $80 per barrel, a 2.9% increase in consumer spending, a 7.7% rise in capital expenditures, and a 12.8% jump in residential construction. Finally, headline CPI is seen rising only 1.9%.

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