"We enter 2014 less optimistic than we have been in the past few years," said BMO's Brian Belski in a note to clients today. "Our models suggest mid-single-digit gains in 2014 based on slightly lower risk premiums, better revision trends and dividend increases, but macro conditions remain an obstacle."
Belski entered 2013 on the bullish side of the Street. However, his sentiment toward the market quickly turned after the S&P 500 blew past his target.
In today's note, he reiterates his expectation that the S&P will rise modestly to 1,900 on EPS of $116.
Here are his bullets:
- Price appreciation of roughly 5.6%, based on our 2013 year-end target of 1,800 – a significantly lower expected return compared with the past two years.
- Another year of relatively muted EPS growth at roughly 5.5%, based on our 2013 EPS target of $110.
- Price multiples to remain relatively flat at roughly 16.4x, given that index P/E has expanded by several multiple points over the past year or so and the fact that equity risk premiums remain stubbornly high.
- Markets to perform strongly during 1H (likely exceeding our year-end target) but fade during 2H, as investors grapple with the removal of QE stimulus.
Unlike some of his peers, Belski sees little lift coming from expansion in the stock market's price-earnings multiple.
"Unfortunately, trends in productivity, labor costs, and profit margins suggest that such levels of EPS growth will be difficult to achieve over the near term," he wrote. "As a result, we believe this provides further evidence that the multiple expansion part of this cycle has largely played out, while future gains will likely require good old fashioned earnings growth."
Belski's 1,900 target puts him write at the median on Wall Street.
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