Traders work on the floor of the New York Stock Exchange. A weak ending to 2015 and the expectation of improving profit growth in 2016 will set the stage for a single-digit gain in US stocks next year, a modest forecast at least by recent standards, according to strategists polled by Reuters.

Reuters
New York


A weak ending to 2015 and the expectation of improving profit growth in 2016 will set the stage for a single-digit gain in US stocks next year, a modest forecast at least by recent standards, according to strategists polled by Reuters.
But even that fairly circumspect outlook faces significant risks, including rising US interest rates and a lackluster global economy, the strategists said.
The S&P 500 is forecast to end 2016 at 2,207, up 10% from Friday’s close of 2,012.37 and 5% higher than where it is expected to round off this year, according to the median forecast of 46 strategists polled by Reuters in the past week.
Strategists were similarly enthusiastic a year ago, when a similar poll pointed to expectations for an 11.5% rise in the S&P 500 for 2015.
With just three weeks left in 2015, the S&P 500 is down a little over 2% for the year. Strategists forecast it will rally into year-end to 2,100, up 2% from 2014.
Even then, that would be the smallest annual increase for the index since 2011, when it ended virtually unchanged.
“We think the (bull market) is going to continue but we’re later into the cycle, so the returns we’re expecting are lower than what we got earlier in the cycle,” said Jill Carey Hall, equity and quant strategist at Bank of America Merrill Lynch in New York.
She and other strategists pointed to a likely improvement in earnings growth next year as a source of strength.
S&P 500 earnings are expected to increase 8.3% next year, up from just 0.3% growth slated for this year, according to Thomson Reuters data.
The S&P 500’s forward price-to-earnings ratio stands at 16.7, still above the historic mean of about 15, based on Thomson Reuters data.
“We think S&P 500 upside will be closely linked to earnings growth delivery,” JP Morgan strategists wrote in their 2016 outlook, adding that energy will be less of a drag as long as oil prices keep from falling further. Still, strategists in the poll said the first US interest rate hike in nearly a decade will create further volatility in the market, even if most investors have priced in a move for when the Federal Reserve ends its policy meeting on Wednesday.
If the Fed raises rates faster than investors expect, that will hit consumer and business spending, they said. It will also likely boost the dollar, which has been a drag on US exporters’ performance.
Respondents cited slower growth in China as among the biggest global worries for US stocks in 2016, along with further Middle East turmoil and more terror attacks.
Yet many strategists expect some US growth-oriented stocks, including financials, will outperform. The S&P 500 financial index is down about 5% for 2015 so far.
“Earnings in the financial sector could surprise to the upside next year. Rising rates generally give them wider spread income, which in this environment should pretty much go straight to the bottom line,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
The Dow Jones industrial average is forecast to rise to 18,975 by year-end 2016, about 10% higher than Friday’s close of 17,265.21. The Dow is forecast to end 2015 at 17,883.