Wall Street's top stock strategists expect the S&P 500 to gain about 6.5 percent from current levels by year-end, but those forecasts face a formidable challenge in the next couple of weeks from corporate earnings season.
A negative outlook for company earnings is already baked in with expectations for the first profit decline in six years. But if the outlook does not brighten for the economy and earnings later in the year, some of Wall Street's rosiest forecasts are at risk.
The average forecast in CNBC's Market Strategist Survey of 15 top Wall Street equity strategists is 2,220 for the S&P 500. The index was trading at around 2,080 midday Thursday, after starting the year at 2,059 for a gain so far of just 1 percent.
"The problem comes if the economic numbers don't pick up over the next month or two, as you come out of earnings season," said Julian Emanuel, equity and derivative strategist at UBS. Emanuel has a midrange target of 2,225, and he expects first-quarter earnings to beat the anticipated operating earnings decline of 4 percent.
Gina Martin Adams, institutional equities strategist at Wells Fargo Securities, said companies have done a good job of guiding expectations lower, so the market could get a lift if earnings beats outnumber misses and the outlook is seen improving after the first several weeks of reports. Earnings started with Alcoa on Wednesday, but get into full swing with major banks and technology next week.
Alcoa's earnings were better than expected, but it missed analysts' expectations for revenue. Adams said the profit beat, at least, was a good sign.
"The metals and mining sector is not one of the high fliers of the index, so that gives you some hope that earnings might come in better than expectations imply," said Adams. Her target for the S&P 500 of 2,222 also falls in the middle of the strategists' targets, which range between 2,100 and 2,325.
"I expect the market to consolidate. The technicals are weak, mixed at best. We've been trading sideways," she said. "On the fundamental side, even if we have some modest beats, I think you have to have confirmation in the forward guidance before the market can get another leg higher. Have downward revisions finally stopped? I think that's a key question for this earnings season."
Emanuel also expects a range-bound market until further into the earnings season, and he said the economic data also have to show signs of turning to convince the market. The first quarter is tracking at just above 1 percent growth, and Friday's surprisingly weak March jobs report raised concerns about further weakness though economists predict a spring back in the second quarter.
"If the economy doesn't pick up, you have to confront the idea that the entire year could be a down year for earnings, and while that's not going to kill the market, that could make later spring into early summer a more volatile period," Emanuel said.
Net income for the S&P 500 is expected to decline 2.7 percent, according to Thomson Reuters. The second quarter is also projected to be negative, with a decline of just more than a half percent, but analysts still see a slight gain in the third quarter.
Thomas Lee with Fundstrat Global Advisors, one of the most bullish strategists, said his biggest fear is that deflation takes hold later in the year. He already anticipates negative first-quarter earnings with his forecast of 2,325.
"They're not going to be great in Q1. It's negative, primarily because you have energy taking a huge wallop," Lee said. "It's almost as if you had one company out of 10 having a bad quarter. Does it mean you have to sell all 10? Earnings tend to be in the rearview mirror. The decline is going to fade as you move through the year."
Lee and Emanuel both said while the sharp drop in oil prices is slamming profits, the extent to which it is a positive for consumers and corporate users has yet to be seen and that should become an increasingly positive influence as the year goes on.
"Energy EPS is expected to fall 65 percent year on year," said Adams. "Bottom-up consensus thinks energy earnings will fall 50 percent for the year as a whole. A lot depends on energy, but now that we've seen oil prices start to stabilize and energy companies themselves are cutting cap ex ... we'll probably see a pretty rapid turn around in the earnings stream."
While strategists also have a wide range of S&P targets, they also have a wide range of 2015 earnings expectations for the S&P—from $117.50 to $128 per share.
"We've said all along there's going to be volatility. If you end up being down 10 to 15 percent at some point this year, I wouldn't be surprised at all," said Emanuel. "To me, that point is likely to come May into June if there's a sense that the second quarter isn't going to provide economic payback we're all expecting. The countervailing force is going to be as we get later in the year, the Fed would be more patient."
The central bank's rate hike plans are clearly hanging over the market as the earnings season starts, and while the markets mostly expect a first increase in September or later, the uncertainty has made for volatility.
While some strategists see a choppy market when the Fed is ready to hike, others say that the market is prepared.
Emanuel said the market should not be surprised by a rate rise, and if the economy is too weak, the Fed will not start the process of liftoff.
But Adams said if the central bank does move faster than expected, that could be a negative. "The Fed's not going to rock the boat, but our sense is they will attempt an interest rate hike or two in the next six months or so. That could take the market by surprise, and usually the impact of a Fed policy change is felt in the multiple."