NEW YORK (
) -- In a year when the
Standard & Poor's 500 Index
may close below the forecasts of every single equity strategist, Deutsche Bank's chief U.S. equity strategist Binky Chadha's call that the S&P 500 would close 2011 at 1550 points was most off the mark, according to data compiled by
Chadha's optimism under-appreciated how an escalating European debt crisis and political gridlock in Washington would curb investor risk appetite. The forecast, which was 13% too rich at April's stock peak and is now 25% too optimistic, correctly estimated corporate earnings, but mistook the premium investors would pay for them.
| Deutsche Bank got the S&P all wrong in 2011
As a result, the sector pair trades he recommended were off base --such as buying energy stocks over materials, industrials over utilities and financials over consumer staples. The materials and utilities sectors more than doubled their earnings, while financials suffered. A call to buy the tech sector over telecoms bore fruit, however.
Chadha came into 2011 expecting that the S&P 500 would add to a 11% annual gain in 2010 by posting an over 21% gain in 2011. Instead, the index is on track to fall, the first drop since the onset of the financial crisis.
The problem is that while companies are growing and
policies are bolstering inflation, neither factor is pushing investors into equities or adding to jobs and economic growth. Instead, earnings are increasing, while economic growth and stock premiums fall.
To get to a year-end forecast of 1550 S&P points, Chadha estimated that companies within the Index would earn $96 a share - and that the multiple that investors pay for stocks would rise 25% to 16.4 times earnings. That multiple's fallen nearly 13% to 13.1 times earnings, causing stocks to fall even as earnings rise.
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Another problem for Chadha wasn't that he was railroaded by unexpected events like the Arab Spring or the tsunami in Japan. Instead, he misjudged non-financial risks to the economy.
In his forecast for 2011, Chadha expected jobs and credit growth, in addition to better than expected earnings and economic data. All of that happened. Stocks weathered a spike in oil prices, unexpected protests and natural disasters, holding near 2011 highs through mid-July.
Nevertheless, Chadha underestimated the risks posed by U.S. politics and the European crisis, which escalated in August.