Wall Street Trimming Forecasts For Stocks and the Economy

Wall Street is scaling back its generally bullish outlook on stocks and the economy for the rest of the year, reflecting continued consumer weakness and investor skittishness.

The big investment firms also are warning that investors should brace for more market volatility and smaller-than-expected returns.

NYSE Trader
NYSE Trader

A handful of major companies recently have cut their forecasts either for the Standard & Poor's 500or gross domestic product. Among them are Goldman Sachs, JPMorgan Chase and Deutsche Bank.

While not everyone is posting actual reductions to outlooks, the trend towards constrained expectations is persistent.

Oppenheimer, for one, reduced its 12-month S&P forecast narrowly, from 1,350 to 1,325, even though it remains a believer in stocks over bonds, which have posted stronger returns this year.

"Despite our bullish forecast, we continue to expect heightened levels of market volatility and investor uncertainty to persist for at least several more months," Oppenheimer analysts said in a recent note.

The firm said "clients remain skeptical" despite relatively strong results from second-quarter earnings season, signifying that markets could gyrate until confidence is restored.

"That does not mean investors should abandon US stocks, particularly considering their solid fundamental properties and reasonable valuations," Oppenheimer said. "Rather, investors should be more strategic and disciplined in their investment approach."

Investors are urged to follow a barbell investing approach, with cyclicals on one end and high-quality dividend players on the other. The firm is overweight consumer discretionary, industrials and information technology, and underweight energy, telecom and utilities.

The generally cautious strategy is common as the market comes off a sizeable July rally but faces an uncertain fate the rest of the yearas the economy languishes and some, including well-known economist David Rosenberg, predict a return to recession.

Analysts at UBS forecast forecast an uptrend in stocks, though not as dramatic as the Oppenheimer target. UBS charts show 1,220 to 1,230 on the S&P as likely support areas for 2010.

In the long range, though, the firm sees sideways trading for as much as 10 more years, though there will be uptrends—"cyclical bull markets," in Wall Street parlance—throughout the period.

"March 2009 marked the mid-point of a long-term secular trading range market," UBS analysts wrote in their outlook. "We can expect another 5-10 years of sideways trading before the start of the next long-term secular bull trend in US equities."

However, in the short term, UBS said if the bull market rally that began in March can be sustained, it could stay intact until 2011.

At BMO Capital Markets, the sentiment is much the same—caution in the face of a weak consumer and an unemployment problem that does not look like it will be resolved anytime soon.

The company holds a portfolio that is overweight defensive stocks such as health care and consumer discretionary and underweight energy and utilities as compared to their S&P index weighting.

The moves reflect worries over consumer spending.

"Saddled by a deleveraging process, the consumer recovery in the current cycle has so far proved the slowest of all," BMO analysts said. "The relatively weak US consumer recovery is linked, both in cause and effect, to the relatively slow recovery in employment."