Citigroup chief U.S. equities strategist Tobias Levkovich slashed his year end S&P 500 outlook to 850, just a few points above its current level, and 1000 by year end 2009.
In a note today, Levkovich said the stock market has not responded to what normally might have stopped it from cratering. Even with the TARP, central bank intervention and the end of the presidential election, stocks have been unable to turn around.
His S&P targets had been 1200 and 1300, respectively. He now sees the Dow at 8,300 at year end, from a previous forecast of 10,800, and at 9,500 at year end 2009.
"One of the most frustrating elements of the market when thinking about its inability to generate any meaningful upward momentum...is that sinking feeling that the traditional catalysts for a rally simply have failed to provide the fuel for such gains," he wrote.
Levkovich said the lack of policy clarity from President-elect Barack Obama has been a factor. Stocks are also pricing in a very deep economic downturn and are pricing in further steep declines in earnings.
"We would note that earnings trends are deteriorating in dramatic fashion as evidenced by the plunging annualized decline in forward 12-months earnings outlooks, creating an environment in which stock prices cannot advance," he wrote. Citi expects 2009 earnings per share of $64 for the S&P 500.
He said Citi's forecast calls for a further drop in EPS of 14 percent, which equals a 30 percent plunge in trailing 12-month EPS, peak to trough. "It appears as if the equity market is implying a 50 percent drop at current index price levels, which we consider overdone but understandable," he wrote.
The "investor mindset" is also being influenced by market technicals, including the S&P's break through the 2002 lows last week. A move to 1,000 by yearend 2009 would be a 33 percent recovery off the recent bottom, "similar to the kind of recovery seen by the end of 2003 vs. the lows of October 2002."
Levkovich said investors will need more evidence of thawing in credit markets and stabilization of business. They may also be lured by the potential for more attractive returns on corporate bonds than on equities. "We must concede that the unpredictable happened and has humbled us all," Levkovich wrote at the conclusion of his note.
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