NEW YORK (Reuters) - U.S. stocks will build on the recent recovery from a selloff earlier this month to rack up an over-8-percent gain for the year, according to a Reuters poll of Wall Street market strategists, extending a bull run that began in 2009.
For now, strong corporate profit growth and a robust economic expansion that is being given additional fiscal stimulus will support further gains in stocks.
But fears of inflation rising sharply enough to prompt the Federal Reserve to speed up interest rate hikes -- which in part sparked the more than 10 percent recent drop from the benchmark S&P 500 stock index's .SPX Jan. 26 record high -- will still plague the market, along with increased volatility.
The S&P 500 is likely to end this year at 2,900, about 8.5 percent above 2017’s finish and 4.3 percent up from Monday’s close of 2779.6, based on the median forecast of more than 50 strategists polled by Reuters in the last two weeks.
The median forecast in the poll for end-2019 was 3,000.
Forecasts for U.S. earnings this year have jumped since December, when U.S. lawmakers approved sweeping changes to the tax law, including slashing the corporate tax rate to 21 percent from 35 percent. Improving economic growth both here and abroad has also lifted profit expectations.
“We’re in an equity-friendly economic backdrop. We have a growing economy, growing corporate earnings. The only reason we’re not more optimistic on our target is because of rising interest rates,” said Leo Grohowski, chief investment officer of BNY Mellon Wealth Management, which has a year-end target of 2,850 on the S&P 500.
The recent deep market losses and optimism about earnings have in turn helped to drive down the benchmark index’s price-to-earnings multiple, easing worries about lofty valuations.
The index at one point this month was trading at its lowest PE ratio in more than a year, according to Thomson Reuters data.
“Things are actually less expensive because of the powerful earnings (growth) and to a certain extent the market pulling back,” said Jonathan Golub, Credit Suisse’s chief U.S. equity strategist, who forecasts the S&P 500 will end the year at 3,000.
“We’re in this nice place where things are moving forward.”
Stocks already have recovered much of the losses of the recent selloff, with the S&P 500 now roughly 4 percent from its peak.
Analysts estimate 2018 earnings growth for S&P 500 companies of 19.2 percent, up from a late December forecast of 11.5 percent.
President Donald Trump’s goal is for U.S. economic growth of 3.0 percent annually. With the tax overhaul already approved, investors are optimistic legislation to boost infrastructure spending may be next.
Many strategists left their 2018 forecasts unchanged from before this month’s selloff, though some said they had already priced a pullback into their numbers.
Volatility spiked sharply during the market correction. Indeed, many strategists in the poll said the Cboe Volatility Index .VIX, a key barometer of expected near-term volatility of the S&P 500 index, this year will stay well above its average of 11 over the past year, mostly likely in the range of 15 to 20. The index ended Monday at 15.80.
“Our market call would continue to be supported by growth but with the risk that we do see a more volatile year than we saw last year,” said Jill Carey Hall, an equity and quantitative strategist at Bank of America Merrill Lynch in New York.
The Fed left interest rates unchanged in January, but said inflation would likely rise this year. The central bank raised rates three times last year and in December policymakers expected three more hikes for this year.
Among sectors that several strategists expect will do well this year are financials, which they say will benefit from higher interest rates, and technology, which led S&P 500 gains last year amid strong profit growth.
On the flip side, strategists see a less favorable year for utilities and other sectors that tend to underperform when rates are rising.
The poll also showed the Dow Jones Industrial Average .DJI ending 2018 at 27,200, 6 percent above Monday's close of 25,709.27. The index is forecast to end 2019 at 27,650.
Additional reporting by Noel Randewich in San Francisco, April Joyner, Alden Bentley, Lewis Krauskopf, Sinead Carew and Chuck Mikolajczak in New York; Editing by Ross Finley and Bernadette Baum