One Wall Street strategist is throwing in the towel with his S&P 500 forecast, lowering his year-end target after stocks slumped in the new year. J.P. Morgan's Dubravko Lakos-Bujas has cut his target for the S&P SPX, +1.41% to 2,000, down from his forecast of 2,200 by the end of 2016, a call that came out in early December. He is head of the bank's U.S. equity strategy team. That new target implies a rally of 6.6% by year's end, given the benchmark closed around 1,877 on Monday. And given the stock gauge ended 2015 at 2,044, that suggests a 2.2% drop for 2016. The prior target of 2,200 implied a 7.6% gain for the year. Lakos-Bujas and his team think the stock market is more likely to face problems, rather than pleasant surprises, due to seven factors. The bank's first three problematic factors are: 1) a rising risk of a U.S. earnings recession; 2) diverging central bank policies, including a Federal Reserve that is trying to tighten, causing the dollar to strengthen; 3) a U.S. manufacturing sector already in recession territory and a non-manufacturing sector continuing to decelerate. The last four issues are, according to J.P. Morgan: 4) a deteriorating macroeconomic backdrop, with China posing a significant risk to global markets; (5) credit spreads widening and high yield nearing recession levels; 6) late cycle dynamics; 7) continued elevated volatility that's likely to hurt investor sentiment. "This all makes for an unattractive equity backdrop," Lakos-Bujas and his team write in a note dated Tuesday. The strategists say they are lowering their 2016 forecast for earnings per share for S&P 500 companies to $120, down from $123, due to a stronger dollar DXY, +0.01% and a lower economic growth forecasts. And that revised base case implies a year-end price target of 2,000 for the S&P, using "a compressed earnings multiple of 16.5x," they write. Couldn't anything help? Maybe central banks, according to the J.P. Morgan strategists. "While in the short term an expected pickup in buyback activity and positive 4Q earnings surprises may provide some support to equities, absent a positive central bank catalyst, we see equity risks skewed to the downside over the medium term," they write. How bad could it get? Lakos-Bujas & Co. say their bear-case scenario for the S&P 500 is a drop to 1,700 by year's end, and their recession case sees the benchmark diving to 1,400. Their bull case sees the index rising to 2,200 — their previous base-case target. J.P. Morgan's team is downbeat on consumer-discretionary stocks XLY, +1.46% in particular, saying they are "further downgrading" those stocks to underweight from neutral. In other words, they've cut that sector to sell from hold. But they've become more upbeat on so-called bond proxies, upgrading utilities XLU, +0.69% and telecoms XTL, +2.55% to neutral from underweight. The team's lower target comes after another J.P. Morgan note warned about "overstaying one's welcome" in the recent stock-market bounce. And it follows a recent study that found investors are better off flipping a coin than following predictions from Wall Street pros. Source: MarketWatch
