As part of our ongoing series of pundit outlooks for 2010, we present here the latest views of Tobias Levkovich, head equity strategist, Citigroup, who on Monday issued a revised forecast for 2010.
What this pundit says:
Mr. Levkovich raised his targets slightly for U.S. stocks (to 1,175 points from 1,150 for the S&P 500, and to 11,150 from 10,900 for the Dow Jones industrial average), but he cautions that he expects a more sluggish year for stocks, coming off the rally that dominated most of 2009. The targets represent gains of just 4-5 per cent from current levels.
"The probabilities of sustained double-digit appreciation in 2010 seem rather low when looking back at history," he says. "In the past, during the year after the one in which recessions ended, the S&P 500 has gained less than 1 per cent, on average, despite earnings growth that averaged better than 10 per cent.
"Since we expect teen-like [earnings per-share percentage]gains in 2010, equities can move higher, but one should not anticipate substantial gains for the full year."
Mr. Levkovich argues that while earnings growth should underpin markets, the gradual unwinding of the U.S. Federal Reserve Board's liquidity measures should weigh on markets, and rising interest rates should contribute to lower price-to-earnings multiples for stocks.
As the market momentum slows, he says, defensive stocks could again take over from the more risk-oriented plays that have paid off handsomely during the 2009 rally. "Investors will find it necessary to adjust their portfolios more frequently in order to post strong relative returns," he suggests.
Mr. Levkovich recommends an overweight position in energy, capital goods and consumer services in the early part of the year, but calls for a shift to more defensive household products and telecom services in the second half of 2010.
He also suggests that U.S. politics could have a considerable influence over the stock market, with mid-term Congressional elections looming in November. He notes that markets have tended to prefer a divided Washington - with different parties controlling the White House and Congress.
"One could witness markets easing off as spring slips into summer and the electoral season swings into full bloom, with the Street waiting to see how the political winds blow," he says. "With the Bush tax cuts expiring, substantial government involvement in various industries and yawning budget deficits, some clarity on the country's political direction may become more important to capital markets."