Wall Street grows cautious but still optimistic: Reuters poll

By Caroline Valetkevitch

NEW YORK (Reuters) - Fears of a prolonged U.S.-China trade war and a potentially overzealous Federal Reserve have left Wall Street strategists less optimistic about stock market gains next year, but they still expect a decent increase, a Reuters poll found.

The benchmark S&P 500 will finish 2019 at 2,975, up around 11 percent from Tuesday's close of 2,682.17, based on the median forecast of 46 strategists polled by Reuters in the last two weeks.

It will end 2018 at 2,800, which would be a near 5 percent gain over last year, according to the poll median.

But the 2019 forecast marks a drop from three months ago, when strategists polled by Reuters predicted the index would reach 3,100 by the end of 2019.

Uncertainty over the outcome of the U.S.-China trade battle - and how long it will go on - has many strategists worried, with some saying any resolution to the conflict should result in a relief rally.

"We're reducing our targets as much due to risk as anything else," said Leo Grohowski, chief investment officer of BNY Mellon Wealth Management in New York. "The longer this trade skirmish lasts, the more potential it has to turn into a trade war." BNY Mellon's end-2019 S&P 500 forecast is 3,000 versus 3,100 in Reuters' last poll.

But most strategists polled were confident the decade-old bull market will go on for at least another year.

While many said the pace of U.S. profit growth is likely to slow, they said earnings and the economy will still be supportive for stocks.

"The earnings growth rate has peaked, but the absolute level of earnings should continue to increase over the coming year as solid sales growth should continue to drive earnings at a lower, more sustainable pace," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute in St. Louis.

Strong U.S. earnings growth this year has been fueled in part by the sweeping tax overhaul approved by Congress late last year, with S&P 500 earnings in the third quarter estimated to jump 28 percent, on track to be the highest since 2010, according to IBES data from Refinitiv.

Profit growth is expected to slow to 8.4 percent in 2019.

Stocks have struggled in recent weeks, with the S&P 500 last Friday confirming its second correction of 2018. A drop in technology and internet stocks marked the latest swoon and shook confidence in a group that has propelled the market in recent years.

The S&P 500 had also entered a correction earlier this year after posting a then-record high in late January, then falling more than 10 percent by early February. That correction lasted roughly seven months, until the index posted a fresh record high in late August.

RISK FROM RISING RATES

Strategists said among the biggest market risks is whether the U.S. and global economies are strong enough to handle much higher interest rates.

The Federal Reserve is expected to hike rates in December for the fourth time this year, but signs of a slowdown overseas and recent market volatility have raised questions about how many rate hikes could come next year.

With the U.S. market's recent losses, many strategists said stocks are fairly priced at current levels.

The S&P 500 is now trading at 16 times forward earnings, compared with 17 three months ago and a long-term average of 15, according to IBES data from Refinitiv.

Despite the recent sell-off in technology shares, some strategists said they still like the sector, while more respondents than in the previous Reuters poll said they are leaning toward defensive sectors, including utilities and consumer staples.

Up almost 4 percent since the end of September, the S&P 500 utilities index is the best-performing sector so far this quarter.

The poll also showed the Dow Jones industrial average finishing 2019 at 26,865, also well below the forecast from the Reuters August poll of 28,700. That would represent a gain of 8.6 percent from Tuesday's close of 24,748.73.

It will end this year at 25,460, up almost 3 percent from 2017.

(Reporting by Caroline Valetkevitch; additional reporting by April Joyner, Chuck Mikolajczak, Sinead Carew, Lewis Krauskopf, Stephen Culp and Alden Bentley in New York and Noel Randewich in San Francisco; Editing by Nick Zieminski)