(Bloomberg News) Forecasters at securities firms are more conservative on U.S. stocks than any time in seven years, predicting the Standard & Poor's 500 Index will rise 7.2 percent in 2012 as budget deficits around the world limit gains.

The benchmark gauge will climb to 1,348 after it was virtually unchanged in 2011 and the U.S. beat every equity market in the developed world except Ireland, according to the average forecast of 12 strategists tracked by Bloomberg. That's the smallest predicted return since 2005. Adam Parker of Morgan Stanley, whose estimate for 2011 proved the most accurate among current analysts, said Europe's debt crisis will keep volatility above historical levels.

Bulls at Oppenheimer & Co. and Citigroup Inc. say record profits and improving U.S. economic data will propel stocks after the S&P 500 advanced 86 percent since March 2009. Parker and UBS AG'S Jonathan Golub say the prospect of a global slowdown will curb investors' appetite for equities and keep the rally from gaining momentum.

"The question we pose is, 'Do you want to be buying it now?'" Golub, the New York-based chief U.S. market strategist at UBS, said in a phone interview on Dec. 29. "A year is a long time. Will there be better entry points than right now? We think the answer is yes."

Smallest Change

Shares fell last week after an expansion in the European Central Bank's balance sheet stoked concern the region's debt crisis will worsen. The S&P 500 lost 0.6 percent to 1,257.6, erasing its 2011 gain and leaving the measure with the smallest price change for any year since 1947. Financial companies led the retreat in 2011, declining 18 percent, and utilities advanced 15 percent.

Golub says the S&P 500 will climb to 1,325 in 2012, the same forecast he gave at the beginning of last year. Credit market conditions, including yields on the 10-year Treasury note that are below 2 percent, are signaling Europe's crisis may worsen in the first half, slowing earnings growth, he said.

The S&P 500 ended 2011 about 8.3 percent below the 1,371 average strategist estimate from 12 months earlier, data compiled by Bloomberg show. The gap compares with a 13-year average of 7.2 percent and is the biggest miss since 2008, when the index's 38 percent retreat left it 45 percent below the mean projection. Wall Street firms underestimated the measure's close by 2.7 percent in 2010 and 3.4 percent in 2009, the data show.

Pared Estimates

Forecasters pared their average 2011 prediction from 1,401 on Aug. 2 after S&P stripped the U.S. of its AAA credit rating, President Barack Obama and Congress struggled over deficit cuts and Europe was forced to bail out Greece. The index moved 1.3 percent a day since April, compared with 50-year average of 0.6 percent before the collapse of Lehman Brothers Holdings Inc.

"Volatility carried the day," Jeffrey Schwarte, a money manager who helps oversee about $231 billion in Des Moines, Iowa, at Principal Global Investors, said in a telephone interview on Dec. 29. "The market was very top-down, looking at the macro drivers, and assumed everybody's going to have poor earnings going forward. That's certainly not the case from our perspective."

Stock advisers are counting on the same things to spur this year's gain as they did in 2011: profits that are exceeding analyst estimates, record low interest rates and prospects for an expanding economy. The S&P 500 rallied as much as 102 percent from its low in March 2009.

Stock Valuations

The benchmark index tumbled 19 percent from its April high through Oct. 3 as more than $3 trillion was wiped from U.S. equities. For the year, the S&P 500 traded at an average price- earnings ratio of 14.1, compared with the five-decade mean of 16.4. The measure is trading at 11.6 times forecasts for 2012 profits, with analysts calling for a 9.7 percent gain to $108.38 a share for S&P 500 earnings, the highest level ever.

Earnings multiples will contract in 2012 as investors concerned about the outcome of the U.S. presidential election, growth in China and Europe's debt crisis refuse to pay more for profits, according to Parker, U.S. equity strategist at Morgan Stanley. Last year's 5.5 percent gain in the Dow Jones Industrial Average compares with an average of 12 percent in years prior to elections since the measure's creation in 1896, data compiled by Bloomberg show.