Wall Street firms stuck with bullish forecasts through the beginning of August as the S&P 500 tumbled amid concern U.S. lawmakers would fail to reach an agreement with President Barack Obama to raise the nation's debt limit. The index fell 11 percent between July 22 and Aug. 5.
Strategists kept their average forecast at 1,401 from July 6 through Aug. 8, when it was cut to 1,389. The measure retreated to an 11-month low of 1,119.46 on Aug. 8 after S&P cut the American credit rating.
Stocks will rebound as investors become convinced leaders in Europe can solve the sovereign crisis, according to UBS's Jonathan Golub. The cost to rescue Europe's banks may reach $2 trillion for governments and private partners, BlackRock Inc. Chairman and Chief Executive Officer Laurence D. Fink said yesterday at an event in Toronto.
"Worst-case outcomes are not going to play through," Golub said in a telephone interview on Oct. 4. "You have 17 countries that have to coordinate their actions, which makes the process more cumbersome, but that doesn't mean they can't come to a resolution."
Golub said in December that the S&P 500 would end this year at 1,325. He raised the estimate to 1,425 in February before cutting it to 1,350 last month, an 18 percent rise from yesterday's closing level. Golub said in 2010 the S&P 500 would finish the year at 1,350 before reducing that estimate to 1,150 in July. The gauge rallied 13 percent to 1,257.64 last year.
The stock index jumped 21 percent in the fourth quarter of 1998 after Russia's default, which caused the collapse of hedge fund Long-Term Capital Management and sent the S&P 500 down 15 percent in August. The measure slumped 12 percent in August and September of this year.
Global equities entered a bear market on Sept. 22, after the MSCI All-Country World Index extended its drop since its peak this year to more than 20 percent. About $3 trillion has been erased from U.S. equities since April 29, sending the S&P 500's valuation to 12.5 times earnings, near the lowest level since March 2009, according to data compiled by Bloomberg.
While investors are abandoning stocks amid concern Europe's crisis will worsen and growth in Asia will slow, equities will rally in the fourth quarter as economic and policy outlooks improve and the Federal Reserve provides additional stimulus, according to Barclays's Barry Knapp. The central bank announced plans on Sept. 21 to buy $400 billion of long-term debt.
Knapp estimates the S&P 500 will rise to 1,325 in 2011. He lowered his prediction from 1,450 a month ago.
"The U.S. situation looks fine," Knapp, the New York- based head of U.S. equity strategy, said in a telephone interview on Oct. 4. "If we were living in isolation here, the market would be much higher."