Goldman Sachs & Co. chief investment strategist Abby Joseph Cohen raised her forecast for the Standard & Poor's 500 index Wednesday, predicting that it will rise 3% by the end of the year as U.S. corporate profits grow faster than analysts had expected.
Higher profits, modest inflation and the likelihood that long-term interest rates won't climb much more this year justify the higher forecast for stocks, said Cohen, who has been one of Wall Street's most optimistic--and accurate--strategists in recent years.
The S&P 500 could reach 1,385 by the end of 1999, which would give it a 12.6% gain for the year, and it could touch 1,450 within 12 months, Cohen said in a report to clients. Her previous forecasts were 1,350 and 1,385, respectively. On Wednesday, the index fell 6.30 points to 1,344.15, up 9.3% for the year.
"As always, we set these targets to be easily achieved," Cohen added.
Blue-chip companies' profits in the first half showed "broad-based improvement that is likely to persist for several quarters," Cohen wrote. "It is typically the durability of profits, rather than a rapid growth rate, that is helpful to stock price performance."
The companies in the index should post an operating profit, on average, of $51 a share this year and $55 in 2000, Cohen said. That's up from her previous forecast of $49 and $53.
Inflation is modest, and much of the rise in bond yields that's likely this year has already occurred, she said. The yield on the 30-year Treasury bond has risen from 5.10% at the beginning of the year to 6.06%.
Cohen said her targets could be undermined by a tightening of U.S. labor markets, which could send interest rates higher. She also cited risks abroad, including deflation in China, weak demand in Japan and persistent unemployment in Europe.
Her forecast of a 12.6% rise in the S&P 500 would mean a slowdown in the rally of recent years. The index has risen an average of 28% annually the last four years--far greater than its historical norm.
Cohen focuses on the S&P 500, though she also provides a forecast for the Dow Jones industrial average because investors request it. She expects the Dow to end this year at 11,500, up 4.2% from Wednesday's level.
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S&P: Back to Single Digits?
After four years of double-digit percentage gains, the blue-chip Standard & Poor's 500 stock index is struggling this year--relatively speaking. The index is up 9.3% year to date. What's more, strategist Abby Cohen at Goldman, Sachs & Co. expects a gain of only about 8% over the next 12 months. Historical price changes (not including dividends) and Cohen's projection through August 2000:
1999 year to date: 9.3%
Estimated gain, next 12 months: 7.9%
Source: Times research; Goldman Sachs & Co.