Survey: Just 22% of experts see the stock market outperforming over next 5 years

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With the stock market close to new all-time highs, investors have been able to mostly look past the coronavirus pandemic, thanks to help from amped-up government spending and near-zero interest rates. But many experts don’t see the party lasting, according to Bankrate’s Third-Quarter Market Mavens survey of investment professionals.

The survey revealed that just 2 of 9 experts surveyed – 22 percent – expected stocks to perform better than normal over the next five years. Some of the pessimism may be due to stocks’ feverish climb from their lows immediately following the emergence of COVID-19. Stocks have set new all-time highs multiple times, and the higher prices dim forward returns.

“Stock investors can thank the Federal Reserve for its significant, thorough and rapid response to the pandemic-related economic downturn which could have easily further snowballed as in the downturn of over a decade ago,” says Mark Hamrick, Bankrate’s senior economic analyst. “The Fed’s measures, including the reduction in interest rates, were followed by multiple rounds of economic relief legislation passed by Congress and signed by the president.”

So where will the economy and stock market go from here?

Bankrate also asked these experts about the direction of interest rates, their one-year outlook for stocks and whether they think growth stocks or value will outperform in the near future.

Key takeaways:

The S&P 500 forecasted to climb 7.5 percent over the next year

“What are we to make of the dramatic and nauseating plunge seen early this year for stocks, followed by a most remarkable rebound for the major averages, fueled by big technology names?” asks Hamrick.

In the survey, experts were reasonably bullish on the Standard & Poor’s 500 Index (S&P 500), despite or perhaps because of the market’s recent run.

On average, investors expected the index to rise to 3,585 by the end of the third quarter 2021. That’s an increase of 7.5 percent from the level of 3,335.47 when the survey ended on Sept. 29. The estimates ranged from 3,300 to 3,850, with only one analyst expecting the index to fall.

In the second-quarter survey, respondents expected a rise of less than 1 percent over the subsequent 12 months, meaning that investors have become notably more bullish on stocks for the short term.

Low interest rates have helped boost experts’ expectations for the market. However, it’s not just low current rates but the expectation that rates will remain near zero into 2024, thanks to promises by the Fed that will likely help put a floor under stock prices in the near term.

“It might not be a smooth ride for the stock market, but the persistence of relatively low interest rates should be an ongoing support factor that at least keeps returns in-line with their historical average,” says Patrick J. O’Hare, chief market analyst at Briefing.com.

But returns over the next five years may be low, say experts

While experts were reasonably optimistic about returns for the next four quarters, they were more pessimistic about stocks over the next five years.

About 44 percent of survey respondents said they expected the market to post lower than normal returns over the next half-decade. Meanwhile, 33 percent said returns would be in line with the historical average, and 22 percent expected returns to be above average.

The reasons for the dour expectations are many, especially on key fundamental factors that may hinder economic growth.

“The combination of the long-term effect of the virus, the rebound of international markets, especially emerging markets, and adverse demographics will keep equity returns muted over the next five years,” says Chuck Self, chief investment officer at iSectors, an ETF strategist based in Appleton, Wisconsin.

But others also cited the already-elevated valuations on stocks as a reason.

“Starting valuations, which are a very good predictor of future returns, are still very high,” says Michael K. Farr, president of Farr, Miller & Washington, LLC, investment advisers in Washington, D.C.

Experts still see global, growth stocks outperforming

When it comes to which kinds of stocks might see outperformance over the next four quarters, this group of experts is divided. Growth stocks have had a nice run over the last decade.

A majority (56 percent) think that growth stocks will beat out value stocks through the third quarter of 2021. Thirty-three percent of experts see value stocks gaining the upper hand, while 11 percent of respondents said the two groups would fare about the same.

“Growth will likely remain in front because interest rates are projected to remain very low, which makes growth stocks look more attractive on a discounted cash flow basis,” says Sam Stovall,  chief investment strategist at CFRA Research based in New York City.

In both the second-quarter and first-quarter surveys, experts favored growth stocks, but they were a bit less bullish this quarter.

Many experts also think global equities will perform better than U.S. stocks.

About 44 percent of respondents said they expect global stocks to outperform domestic ones over the next 12 months, while 33 percent see them staying the same. The remainder (22 percent) see global stocks performing in line with American names.

“If we assume there is an effective COVID-19 vaccine in use, all areas will be in rebound mode, but we’d give the edge to global markets since returns in the U.S. could be constrained by a reallocation away from the heavily weighted mega-cap stocks,” says O’Hare.

Yet others like the huge tech names and expect them to do well in the near term.

“Mega-cap tech and communications stocks will continue to thrive in the U.S. and buoy U.S. indexes,” says Tom Lydon, CEO of ETF Trends.

While tech stocks such as Apple and Amazon have been some of the strongest performers in the market rebound, 78 percent of experts in Bankrate’s survey think there’s a good chance that the market’s performance broadens out beyond such large tech names. Meanwhile 11 percent said there’s a moderate chance of that, while 11 percent believe there’s only a small chance of it.

“Industrials and cyclicals are too cheap to overlook right now, given strong manufacturing data,” says David Wagner III, portfolio manager at Aptus Capital Advisors in Fairhope, Alabama.

10-year Treasury yields will be modestly up, say analysts

Expectations for the performance of the stock market are at least partly anchored in continued low interest rates, and the Fed has left little doubt that it will maintain low rates for some time.

So, not surprisingly, the experts surveyed expected only a modest rise in the 10-year Treasury yield over the next year.

On average, experts figured the rate on the government bond would rise to 0.87 percent, from a yield of 0.67 percent at the end of the survey period. The forecasts ranged from 0.50 percent to 1.5 percent, with two respondents picking the lower end of the range.

In Bankrate’s second-quarter survey, analysts expected the 10-year Treasury to be at 0.86 in 12 months, while the first-quarter results showed an estimate of 1.39 percent a year out. Those figures fell sharply from 2.14 percent in the fourth quarter of 2019, before the pandemic broke.

The election’s impact on the market

With the U.S. presidential election just a few weeks away, many market watchers are focused on what the outcome could mean for stocks.

Most respondents to the Bankrate survey expected at least some correlation between the market and the election’s outcome. About 44 percent said stocks’ performance depends “somewhat” on the election. A further 22 percent said it matters a “great deal” on the outcome, while 33 percent said it does not depend on the results.

“With a potential change in tax policy, tariffs and regulatory efforts hanging over this election, the stock market is certain to show increased sensitivity in the near term to the outcome of the election,” says O’Hare.

“Stocks do depend on the election outcome, but not just for the headline gain,” says Robert A. Brusca, chief economist at FAO Economics. While noting that Democrats have not been bad for stocks, he does say that a win by the Democrats could be “important for the actual sectors that will benefit or lose out.”

And if you’re sweating what looks like a Democratic victory, you might want to think not only forward but backward, too.

“A Democratic sweep of the White House and both houses of Congress could trigger a November sell-off from the shock of the sweep,” says Stovall. “However, in the five times since World War II in which the Democrats scored a triple play, the market was up 100 percent of the time in December and up 10.4 percent in the following calendar year, rising 80 percent of the time.”

Methodology

Bankrate’s third-quarter 2020 survey of stock market professionals was conducted from September 23-29 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Patrick J. O’Hare, Briefing.com chief market analyst; Chuck Self, chief investment officer, iSectors; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners; Sam Stovall, CFRA Research, chief investment strategist; Chuck Carlson, CFA, CEO, Horizon Investment Services; David Wagner III, portfolio manager, Aptus Capital Advisors; Michael K. Farr, president of Farr, Miller & Washington, LLC; Tom Lydon, CEO, ETF Trends; Robert A. Brusca, chief economist, Fact And Opinion Economics.