The Russia-Ukraine war has added a big layer of uncertainty to the stock market that led a slew of Wall Street strategists to cut their S & P 500 year-end targets. Top strategists from Citi to UBS, Yardeni Research and Evercore ISI have lowered their U.S. equity outlook as the escalated geopolitical tensions caused turmoil in global markets. Long-time market bull Ed Yardeni has turned into one of the biggest bears on Wall Street, seeing the S & P 500 suffer a 16% decline through 2022 to end at 4,000. "We now think that this could turn out to be one of the most dangerous years for stock investors of the current bull market," Yardeni said in a note. "For the U.S. economy, we now see stagflation, with persistently higher inflation and less economic growth than expected before the war. A recession can no longer be ruled out." To be sure, Yardeni doesn't expect the turmoil to extend beyond 2022 as he sees the S & P 500 rebound 25% to a new record of 5,000 next year. The S & P 500 suffered a sharp sell-off in 2022, down more than 10% as geopolitical risks added to fears of inflation and higher interest rates. The tech-heavy Nasdaq Composite bore the brunt of the stock rout, falling about 16% year to date. $150 oil? UBS detailed its downside scenario in which oil prices could surge above $150 per barrel and the S & P 500 would tumble about 15% from current levels to 3,700 by the end of 2022. "The scenario would also heighten the risk of 'stagflation,'" said Mark Haefele, chief investment officer, global wealth management at UBS. "With rates of inflation staying even higher for even longer, the possibility of wage-price spirals would increase," he wrote in a research note. "This could lead central banks to hike rates aggressively, despite already weak growth." U.S. crude oil spiked to a 13-year high of $130 overnight on Sunday as the market reacted to supply disruptions stemming from Russia's ongoing invasion of Ukraine and the possibility of a ban on Russian oil and natural gas. UBS' "central" scenario still calls for elevated commodity prices through the second half of 2022, but the firm expects corporate earnings to remain solid and inflation to ease with rate hikes from global central banks. In this scenario, its S & P target is set at 4,800 for 2022, about 10% above current levels. "Greater stability by year-end would also likely reduce the geopolitical risk premium currently priced into markets, with 2023 earnings broadly unaffected. Inflation could also be expected to fall over the course of the year in this scenario, albeit later than originally expected," UBS' Haefele said. Flattish return Among the strategists that lowered their stock forecasts, some are still positive that the market could see a sizeable rebound soon. Citi cut its 2022 S & P 500 price target to 4,700 from a previous 5,100 amid Russia's invasion of Ukraine. The price target represents a nearly 9% gain in the benchmark from here as the firm sees no change to its index-level earnings expectations. "We see upside to U.S. equities from here as the market narrative moves past the current perfect storm of headwinds, but to a level implying a flattish, to slightly down full-year return," Citi's Scott Chronert said in a note. Similarly, Evercore ISI reduced its year-end 2022 S & P 500 target to 4,800 from 5,100, but the firm remains bullish on the economy's reopening from the pandemic. "Because although the growth trajectory for the U.S. economy is moderating it remains strong, moving toward 'reopening,'" Evercore's Julian Emanuel said in a note. "And the forward returns history of defensive investor sentiment is one of rising share prices." The strategist recommended investors keep exposures balanced, focusing on value stocks over growth, as well as companies with pricing power and margin expansion capabilities. "While cash depreciates in inflation, it lets the investor be in position to buy into further material weakness, not sell," Emanuel added.
A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 2, 2022. REUTERS/Brendan McDermid
Brendan McDermid | Reuters
The Russia-Ukraine war has added a big layer of uncertainty to the stock market that led a slew of Wall Street strategists to cut their S&P 500 year-end targets.