At the end of every year the big banks on Wall Street call all their top strategists into one room, pour them a large cup of coffee and ask them to predict the future. The result is pages of predictions on everything from the economy to the stock market to the political landscape.
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We shifted through those pages and pulled out what investors really want to know: Where should I put my money?
Bank of America: As uncertainty lifts, valuations should improve
Bank of America (BAC) is banking on improved clarity on the U.S. debt crisis, Europe and China. As a result of these overhangs, the bank believes the S&P is currently undervalued compared to other assets and its own historical measures. As the fog begins to lift on the uncertainties around the globe, BofA anticipates the S&P 500 will end the year near 1600. With the market undervalued and economic activity expected to pick up over the next three quarters, Bank of America is recommending investors be overweight energy, industrials and technology stocks. All these categories are attractively valued, with tech stocks trading at a discount to the market for the first time in 20 years. On the flip side they recommend being underweight bond proxies within the equity market, namely telecom and utilities, both of which are at near or peak valuations.
Citigroup: Keen on Thirteen
Citigroup (C) is one of the most bullish banks on the street when it comes to 2013. The firm is calling for the S&P to rise to 1615 this year and the Dow Jones Industrials to hit 15,300. The bank cites the large amount of money that individual investors have pulled from US stock mutual funds over the past four years as the big reasons for their bullish call. The S&P has rewarded investors with a better than 14% compounded annual return since 2008, outpacing U.S. treasuries as well as other assets. The firm expects investors will soon start to see the immense value of stocks versus bonds and put money to work in the markets. They favor the IT sector, telecom services, utilities and insurance names within the financials. They caution against consumer discretionary groups and some defensive areas such as pharmaceuticals and biotechnology, saying valuations look extended.
Goldman Sachs: Look past near-term risk to improving prospects
Goldman Sachs’ (GS) investment theme for 2013 is to look past the near-term political risk out there and look ahead to the improving growth prospects this year. Those growth prospects don’t seem very high, though, with the company predicting we’ll see the economy grow by a mere 1.9% in 2013 and 2.9% in 2014 (2012 3Q GDP was 3.1%). Their S&P target for year-end is below both Bank of America and Citigroup at 1575. The firm believes the turbulent political environment that curtailed corporate risk will end and, as a result, corporate sales will rise, earnings will climb and P/E multiples will expand modestly. The firm believes cyclical sectors will beat defensive sectors this year with tech, materials and industrials outperforming consumer staples, telecom and health care. Goldman is also calling for stocks with high BRIC revenue exposure to outperform domestic-facing firms.
Wells Fargo: Forward Looking Factors
Wells Fargo (WFC) is staying bullish with an S&P target of 1525-1575 by year-end. The bank is basing its call on forward-looking factors that it believes will benefit investors next year. These factors include the growth in building permits, homebuilder sentiment, manufacturing data and consumer sentiment which will buoy spending. The positive economic data should also help the economy grow at a rate of 2.5% in 2013. One striking element of Wells Fargo’s yearly outlook is its stance on the state of the Fed’s quantitative easing program. They believe that not only will the QE programs continue in 2013 but that the Fed may eventually exceed the $40B per month that it has already announced it would purchase. Based on these economic assumptions the bank is recommending investors stay in cyclical sectors whose earnings have been negatively impacted by sluggish growth. These sectors include consumer discretionary, technology, materials and telecom services (for a touch of dividend yield). If Europe bottoms, they say be even more aggressive toward cyclical and lean towards large caps over small caps.