The stock market isn’t going to break any speed records this year.
Just like how people move more slowly when they age, the six-year-old bull market is no longer racing ahead. But it’s still likely to move higher.
That’s the main takeaway from a CNNMoney survey of 20 investing professionals. These investing experts expect the S&P 500 to end the year at 2,183. That implies a rise of just 3% from current levels. Given the paltry gains during the first half of 2015, that would translate to an annual advance of 6%.
It would be a decent return, but it will feel puny after so many years of stellar stock market performance. A 6% return this year would be less than half of last year’s advance and a far cry from 2013 when the S&P 500 surged nearly 30%.
Think of it like the stock market shifting into low gear after years of pushing the speed limit.
So why are stocks taking a breather this year? It’s simple. After more than tripling since March 2009, the stock market no longer looks cheap.
That’s especially true because earnings — the engine of the stock market — are aren’t growing at an impressive pace. Profits have been clipped by the strong U.S. dollar, cheap oil and an economic slowdown in many parts of the world.
“Stocks appear priced to perfection,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “An improving economy is needed to drive earnings, and higher earnings are needed to support higher stock prices.”
Better economy should help: Thankfully, the economic picture is looking brighter. After going in reverse during the first quarter, many expect a second quarter bounce. Recent housing and auto sales reports have been impressive, reflecting signs of stronger consumer spending. All of that should boost earnings and thus stock prices.
Of course, a stronger economy raises the chances the Federal Reserve will end its policy of extremely low interest rates. While that would be a vote of confidence in the economy, it would also represent a shift away from the cheap credit that has helped drive risky assets like stocks higher.
Get ready for a September rate hike: Eighty-seven percent of respondents to the CNNMoney survey expect the Fed to raise rates by September. Investors are understandably nervous about the start of the first rate hike cycle in more than a decade.
There’s also concern the Fed will remove the economy’s safety net too early, causing a new crisis. A misstep by the Fed was ranked as one of the biggest risks to the stock market by the investing professionals polled.
If a Fed move catches investors off guard, brace for turbulence, especially in fixed income.
“We continue to worry about a mismatch between market expectations and what the Fed will actually do with regard to tightening. There is a risk of much higher volatility and a significant correction in bond markets,” said Kristina Hooper, U.S. investment strategist at Allianz Global Investors.
No bubble: The good news is that none of the market professionals expressed serious concern about an imminent bubble in U.S. stocks despite their record-high levels. They aren’t telling their clients to jump ship.
“The classic signs of a frothy market leading to a significant pullback or correction are not evident…Investor euphoria or extreme optimism is lacking,” Sandven said.
Europe still a favorite: Still, don’t bank on American stocks catching up to their overseas counterparts this year. In fact, many investment strategists said they believe a number of foreign markets hold the most upside at this point.
Despite a strong first half of the year and the crisis in Greece, European stocks remains a big favorite. That’s mostly because of the European Central Bank’s powerful stimulus program, which should lift equities and boost exports by weakening the euro.
“The eurozone probably has the most potential, but also commensurate risks due to the Greek crisis,” said Brian Peery, portfolio manager at Hennessy Funds.
Japan may have greater upside: Asia is also a hot spot. No respondents said they believed China offered the best opportunity. That’s probably because the market there is so hot — the Shenzhen Stock Exchange is up 100% this year even after a recent plunge — that fears of a bubble are growing louder.
Yet Japan continues to look attractive. The Nikkei is “only” up 20% this year, and there may be room for further growth.
James Solloway, senior portfolio manager at SEI, said Japan is his top pick because of “valuation, aggressive, expansive monetary policy and corporate governance improvements.”