The S&P 500 index (SPX) could be in for a wild ride in the future and we could even see a decline of almost 10 percent in equity values. This is what the analysts of Deutsche Bank are saying.
In a report released on Monday, analyst David Bianco said that if the Federal Reserve increases interest rates sooner than expected, the SPX is going to probably dip by 5% to 9%.
Added to this, with the uncertainty regarding the actions of the Fed, yields could climb higher while the risk of Greece exiting the euro zone mixed with the European Central Bank’s (ECB) commitment to high liquidity, could push the euro (EUR) lower.
These uncertainties are currently being offset by expectations that the U.S. could see economic growth of about 3 percent this year. As we have seen, despite the stronger U.S. dollar (USD), the S&P 500 companies have reported higher earnings. Also, according to Deutsche Bank, with zero bond yields, until now, there have only been compelling reasons to buy into stocks.
Providing some advice, Deutsche Bank has recommended that investors ‘buy on dips’ while also focusing on large cap tech, health care and banking stocks. The bank also handpicked 13 stocks which it refers to as ‘dividend dogs’. That is, these are megacap stocks which while they underperformed, they did pay out a divided yield of more than 3 percent. For example, AT&T Inc. (T, +0.06%), Coca-Cola Co. (KO, +0.15%), Exxon Mobil Corp. (XOM, +0.68%), General Electric Co. (GE, -0.18%) and others.
On Friday last week, the U.S. jobs data for May came in better than expected. Based on this, Deutsche Bank is now forecasting that the Fed will increase interest rates in September this year. Should this happen, the SPX should reach 2,200 by the end of the year. This will be achieved by a gradual climb while the gains of the USD will be limited and long-term Treasury yields will stay under 2.75% until the end of the year.
On the 20th of May, the S&P 500 index hit a record high of 2,134. The benchmark index is now trading around 2,086.
MT4 Chart: Deutsche Bank
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