Wall Street strategists see market back-pedaling by year-end

By Noel Randewich

SAN FRANCISCO (Reuters) – Don’t get too attached to those recent stock market gains, at least according to strategists polled by Reuters.

Wall Street’s rally is likely run out of fuel as investors fret about the November presidential election, with the major indexes ending 2020 below current record highs, according to the poll, conducted over the past two weeks.

The S&P 500 will end 2020 at 3,300 points, down over 4% from current levels, according to the median forecast of about 55 market strategists and fund managers.

That would leave the closely watched benchmark with an annual 2% gain in a year that saw the coronavirus cripple the global economy and leave tens of millions of Americans out of work.

While strategists are generally unsuccessful at predicting stock market performance, their forecasts provide a valuable snapshot of expectations across Wall Street.

Uncertainty about the outcome of the Nov. 3 presidential vote and how it affects markets is becoming a major concern for investors.

For weeks ahead of the 2016 election, strategists warned that instability caused by a potential Donald Trump victory would hurt Wall Street, only to see markets rally after he won.

With President Trump repeatedly claiming, without evidence, that plans to allow mail-in ballots would lead to a surge in electoral fraud, some investment strategists warn that uncertainty about the integrity of the vote and its outcome could roil financial markets.

So could a potential knockout blow by Democrats, giving the party control of Congress as well as the executive branch, which could lead to higher taxes and tighter regulation, some respondents said.

“The market is not pricing in the potential for a Democrat sweep in November, which would create massive headwinds for the economy and the markets,” said Synovus Trust portfolio manager Daniel Morgan.

The S&P 500 last week returned to record highs for the first time since February, wiping out all of the deep losses caused by the coronavirus pandemic. The index’s new highs confirm, according to a widely accepted definition, that the S&P 500 entered a new bull market after tumbling to a low on March 23.

Behind the S&P 500’s over 50% recovery have been bets on a potential coronavirus vaccine, trillions of dollars in fiscal and monetary stimulus, and a surprisingly high percentage of companies that beat earnings expectations in the second quarter.

Still, many investors worry about the disconnect between the stock market and the U.S. economy, which remains crippled by high unemployment and a resurgence in virus cases in parts of the United States.

Forecasts from IBES data from Refinitiv show analysts expect a 20% decline in earnings for S&P 500 companies for 2020, with the second quarter still seen as the low point for this year. Earnings are expected to increase 28% in 2021, according to Refinitiv.

The poll also showed strategists expect the Dow Jones Industrial average <.DJI> to finish 2020 at around 28,330, which would represent an increase of less than 1% from Tuesday. Up 55% from its March bottom, the Dow is still down nearly 5% from its February record high.

The median prediction for the S&P 500’s closing level in 2021 was 3,500, equivalent to a near 2% increase from Tuesday’s level.

(Additional reporting by Caroline Valetkevitch and Sinead Carew in New York; Additional polling by Khushboo Mittal and Sarmista Sen; Editing by Toby Chopra)