Another day, another set of predictions from Wall Street analysts for 2017. This time the predictions come from Barclays' (NYSE:BCS) US Equity Strategy team headed by Jonathan Glionna and Eric Slover, CFA.
Glionna and Slover have outlined five predictions they think will take place in 2017. The calls are based on the duo’s expectations for earnings growth, dividend growth, buyback stagnation and capital appreciation. All in all, after a steady 2016, Barclays’ analysts are expecting more of the same next year.
Barclays Five Predictions For 2017
Prediction One
Glionna and Slover’s first call is that S&P 500 adjusted EPS will break out to at least $127/share next year. Following two years of stagnation thanks to falling oil prices and contracting profit margins, the analysts believe EPS growth is set to return next year off the back of higher GDP growth. Further, it is expected revenue expansion will return, more than offsetting rising wage pressure. Index EPS of $127 per share would represent 7% year-on-year growth. The upside case is $133 per share representing 12% growth thanks to Trump tax cuts.
Prediction Two
Prediction two is dividends will reach $48/share, marking a 54% increase in just five years. Rapid and consistent growth in dividends has been one of the most positive themes for the S&P 500, and this is expected to continue through 2017. The forecast is for dividends to grow by 5% to $48 per share. A high payout ratio should constrain growth but not eliminate it. Companies in the S&P 500 will pay dividends equal to 38% of adjusted earnings per share in 2017.
Prediction Three
Unlike other groups of analysts, who are predicting a surge of buyback activity next year off the back of a repatriation tax holiday, Barclays’ analysts believe Gross buybacks will be unchanged at approximately $600 billion. Although this is a conservative forecast. If tax changes do come into force, the bank believes the value of buybacks will increase, but leverage ratios will constrain general repurchase activity. The number of companies in the S&P 500 with debt-to-EBITDA ratios above 2.5x is approaching 200 and interest coverage ratios have been on a steady decline. An earnings jump due to President-elect Trump’s tax plan will not improve debt-to-EBITDA measures although cash flow would benefit.
Prediction Four
The S&P 500 will end the year at 2400. This target is approximately 7% higher than the S&P 500’s closing level on December 12 and is based purely on EPS growth with no multiple expansion. The index could hit a high of 2500 if Trump administration tax policies help EPS expand 12%. The downside risk is a 10% decline to 2000, reflection “reflecting tighter financial conditions but no recession.”
Prediction Five
Healthcare has been the worse-performing sector in the S&P 500 this year, but next year, Barclays’ analysts expect the sector’s performance to rebound. The healthcare sector is now trading at a P/E more than one standard deviation below its 10-year average and the lowest of any sector by this measure. Also, the PE ratio of the healthcare sector is at a 52-week low against the overall market and against almost every other sector. It even looks cheap against other defensive sectors that have lagged the rally such as staples and utilities.
