Can Stocks Deliver the Goods in 2015?

December 1st Weekly Market Update

We believe stocks will deliver mid- to high-single-digit returns in 2015, with a focus on earnings over valuations. We believe 3% economic growth, benign global monetary policy, and a more favorable policy climate from Washington indicate that the powerful, nearly six-year-old bull market should continue.

Historically since WWII, the average annual gain on stocks has been 7–9%. Thus, our forecast is in-line with average stock market growth. We forecast a 5 – 9% gain, including dividends, for U.S. stocks in 2015 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies growing 5 – 10%. Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2015. We expect stocks, not bonds, to be the precious cargo for investors in 2015.

The coming year will be one marked by transitions. Cycles that are in transition can cause potential fluctuations and volatility even if they have historically provided solid stock market performance. The most important cycle, the economic cycle, is unlikely to reach a recession destination in 2015,positioning the stock market to potentially offer up solid gains to investors. In fact, since 1950, in years during which the U.S. economy does not enter recession, the odds of a positive year for the S&P 500 were 82%, with an average gain of 11%. Recessions do not run on a set schedule and are difficult to pinpoint in advance, but our belief, based on our favorite leading indicators for the economy, is that the probability of recession is very low and stocks could potentially send investors solid returns in the coming year.

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