True, most forecasts are for modest gains in 2015, compared with the 13% increase in the S&P 500 (SPY) expected this year. But strategists aren't cutting back their forecasts despite the Fed's signal on Wednesday that rates will be rising next year. Some even say the hike may not come until well into the second half of the year or later. Interest rates are key to 2015 forecasts.
David Kostin, chief U.S. equity strategist at Goldman Sachs, expects the S&P 500 will end 2015 at 2,100 --- 3% above current levels but says they could end a lot higher "if interest rates in 2015 remain below our forecast." Kostin expects the Fed's rate will rise to 0.6% in 2015, up from 0% to 0.25% currently, and the 10-year Treasury yield will reach 3%. (It's currently at 2.2%.)
But if the 10-year Treasury rate tops out at 2.5% or below and there's no change to earnings per share -- Kostin expects $122 per share in the S&P 500 -- or to the risk premium of stocks over Treasuries, he says the S&P could reach 2,300 by the end of 2015.
That's near the 2015 forecast of John Stoltzfus, chief market strategist Oppenheimer. He's targeting 2,311 for the S&P 500 at the end of 2015, supported by improving economic fundamentals, steady increases in earnings and a lower oil price. And he favors consumer discretionary stocks, which will benefit from lower oil prices, as well as industrials, materials, tech and health care stocks.
The sharp drop in oil prices is another key component in strategists' outlook for 2015. Crude oil is trading near 5-year lows, under $60 a barrel, at about half of their price earlier in the year. They could rise in 2015 -- Fed Chair Janet Yellen called the oil price decline "transitory" in Wednesday's press conference -- but they're not expected to get back to $100 a barrel any time soon.
And lower oil prices, despite Yellen's comments, could be a key factor for the timing of the Fed's first rate hike since June 2006. The Fed lowered its inflation projections for 2015 largely because of falling energy prices. The latest consumer price report fell 0.3% -- its biggest drop in almost six years -- primarily because of falling gasoline prices.
If the price drop isn't transitory, as Yellen says, and inflationary expectations don't rise, the Fed may not even raise rates at all for 2015, says Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors, lending even more support to the stock market. He expects stocks will decline in the short term, then recover by the fourth quarter with a gain of 5-6%.
That's at the lower end of expected gains that strategists are forecasting for 2015. The average 2015 year-end target for the S&P 500 among the 10 major market strategists surveyed by Barron's is 2,208, which represents an 8% gain from current levels.