Stocks will finally receive their comeuppance this year, likely dropping 20 percent, says
Ambrose Evans-Pritchard, international business editor for The Daily Telegraph.
The move will be triggered largely by economic weakness overseas, he writes. "The eurozone will be in deflation by February, forlornly trying to ignite its damp wood by rubbing stones."
As for U.S. stocks, "the S&P 500 will not defy monetary gravity or the feedback loops of global stress for much longer," Evans-Pritchard says. He notes that about 50 percent of revenue for large U.S. companies comes from overseas. So a stronger dollar will hurt those companies.
In addition, "the profit share of GDP is at a post-war high of 12.5 percent (much like 1929), an untenable level as wages start to rise and the balance of power swings back to labor," Evans-Pritchard adds.
"The S&P index measuring the price-to-sales ratio is higher today than at its pre-Lehman peak.
Expect a shake-out of 20 percent, comparable to . . . 1998 when the wheels came off in Russia and East Asia, though don't be shocked by worse."
A 20 percent drop by the S&P 500 this year would leave it at 1,647.
Meanwhile, Savita Subramanian, head of equity strategy at Bank of America, thinks the index will rise 7 percent this year. But oil prices' plunge to 5 ½-year lows Friday could upset the apple cart, she says.
"If oil prices do stay at these levels, that would be a risk," she tells
The Wall Street Journal. "The contribution from oil prices to earnings is actually larger than the lift to consumption" created by lower oil prices.
Consumer staples, a few consumer-discretionary stocks, transportation stocks and airlines would benefit from the low oil prices, Subramanian explains. "But the positive there is not enough to offset the negative for the other [sectors]."
Still, Subramanian forecasts the S&P 500 will reach 2,200 this year. "It's primarily driven by earnings growth," she notes.
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