NEW YORK (Reuters) - The U.S. Standard & Poor's 500 index is expected to finish the year down for the first time in three years as an escalating European debt crisis and stalling U.S. economy lead strategists to slash forecasts in the latest Reuters poll.
Concern about whether the United States may be able to avoid another recession has hit stocks hard over the past few months and strategists polled by Reuters have accordingly taken a hatchet to optimistic forecasts made in June.
Since then, the euro zone debt crisis has escalated to the point that even U.S. President Barack Obama warned it was "scaring the world," sending global stocks plummeting as Europe's leaders struggle to mount an effective response to a problem that could yet unravel into a new financial crisis.
The S&P 500 index is expected to rise slightly from current levels to 1,250 by year-end, a huge 150-point downgrade from the 1,400 consensus three months ago, according to a median forecast from 47 respondents polled in the past 10 days.
That would put the index down a sliver from where it started the year. Forecasts ranged from a high of 1,425 to a low of 974.
"Stocks will likely remain in a long-term bear market, with vicious cyclical swings," said Gina Martin Adams, senior equity analyst at Wells Fargo Securities in New York.
Should U.S. stocks end the year as forecast, it would be the worst performance since the 2008 financial crisis. The S&P 500 ended last year up 12.8 percent.
Strategists aren't optimistic about early next year either, projecting the S&P 500 at just 1,300 by mid-2012.
The index is down over 8 percent for the year and has been in the red since early August, hit by constant worries over whether European leaders will be able to contain the region's debt crisis and fears of another U.S. recession.
"The European crisis and renewed weakness in the U.S. economic data are both symptoms of the same debt disease, in my view," said Adams. Wells Fargo's year-end S&P 500 forecast is 1,250, down from 1,275 in the June poll.
DOW PLOUGHS ON
For the Dow Jones industrial average, the survey showed a forecast of 11,800 for end-2011, up a little under 2 percent on the year and 7.2 percent from Wednesday's close. It is seen at 12,200 by mid-2011.
That would make it one of only major two stock indexes -- the other being South Korea's KOPSI -- that analysts expect will rise over the full course of 2011.
Some investors had been holding out hope the Federal Reserve would be able to help the market with more large-scale bond purchases, or quantitative easing.
Stocks plunged last week when the Fed cited "significant downside risks" to the economy, and said it would shift into more long-term Treasury securities in an effort to lower borrowing rates but with no net new purchases.
The economy barely grew in the first half of the year, and the consensus among economists for the probability of another U.S. recession in the next 12 months rose to 31 percent in a Reuters poll earlier this month. >
A downgrade of U.S. debt by U.S. ratings agency Standard & Poor's, along with political wrangling in Washington to avoid a U.S. debt default that led to that downgrade, also hammered U.S. stocks over the last several months.
Still, some strategists are expecting a sharp bounce between now and year end.
"You almost need things to deteriorate a lot further from here in order to justify valuations. You have an S&P trading at less than 11 times forward multiples," said Jonathan Golub, chief U.S. equity strategist at UBS in New York.
Golub has a year-end S&P 500 target of 1,350.
Stronger-than-expected earnings could underpin the market. Even though analysts have begun to scale back forecasts for third-quarter results, due to begin in mid-October. Profits are expected to have increased 13.6 percent from a year ago, according to Thomson Reuters data.
Strong profits were the main catalyst for the market's rebound from 12-year lows in 2009.
"The market is positioned very, very short and is positioned just like it was right around that time," of the fall 2008 Lehman Brothers collapse, said Deutsche Bank's chief U.S. equity strategist, Binky Chadha, who has a 1,425 year-end target on the S&P 500.
(Additional polling and reporting by Edward Krudy, Ryan Vlastelica, Charles Mikolajczak, Rodrigo Campos and Angela Moon in New York, and additional polling by Ruby Cherian and Shaloo Shrivastava; Editing by Jon Loades-Carter)