TheChek News Flow

Asia equity markets are rising in the wake of a somewhat disappointing non-farm payrolls report out of the US on Friday. Outside of the delayed impact from US jobs data, Asia economic calendar was dominated by Services and Composite PMI figures. China Caixin Services saw a slight bounce to 52.1 from 51.7, and economists noted business activity driven by new project, stabilization in staffing, rising backlogs, and higher input prices. In Hong Kong, composite PMI came out in contraction for the 18th straight month, but that decline also narrowed. Here, economists noted less pressure on operating capacity and more slack in staffing, as employment declined for 8th straight month. While the worst of Hong Kong slowdown was seen as being over, economist still called for "sustained recovery (needing) to take place, which may be challenging given the relatively weak global economic environment." BOJ Gov Kuroda acknowledged that negative rates policy has had some side effects such as deterioration of bank profits, but also reiterated central bank's commitment to do utmost to achieve 2% inflation target and willingness to go deeper in the red on rates.

Nikkei +0.58% Hang Seng +1.61% CSI 0.19% Shanghai +0.17%

Eur$ 1.1179 CNH 6.6871 CNY 6.6763 JPY 103.36 GBP 1.3323 CHF 0.9786 RUB$64.9913 WTI$ 44.28 (+0.29%)

S&P +0.17% EuroStoxx +0.36% Dax +0.43% SMI +0.35%

Macro :

- G-20 Statement Said to Make Reference to Steel Market Glut

- Russia Needs to Cut Key Rate Much Faster Than Now: VTB’s Kostin

- OECD Says Central Banks Near Limits to Stimulate Growth: Reuters

- May Warns of ‘Difficulties Times Ahead’ for U.K. Economy

- With Nowhere to Go, This $64 Billion Asset Manager Bets on VIX

- Draghi Nears His QE3 as ECB Seen Relying on Ever-More Stimulus

- Nikkei India Aug. Composite PMI 54.6 vs 52.4 in July

Keep an eye on :

- AC FP : Accor Keen to Increase Presence in Japan, Myanmar, India: BT

- ADP FP : ADP Tariffs Approved by Regulator After Initial Rejection

- AF FP : Air France-KLM CEO to Present New Plan to Board Nov. 2: Tribune

- ATC NA : Altice Offers 8 Shares for 5 of SFR in Recommended Bid

- AZN LN : AstraZeneca’s Benralizumab Shows Positive Results in Asthma

- IF IM : Banca Ifis Is Considering Buying EU2b Bad Loans by Year End

- BAYN GY : Bayer Supervisory Bd May Discuss Higher Monsanto Bid Sep 14: RP

- BLT LN : BHP Billiton Says Higher Iron Ore Tax ‘Bad Policy’: AFR, May Says Still Deliberating on Hinkley, Hasn’t Decided Yet

- CABK SM : CaixaBank Mulls Pulling Banco BPI Bid, El Confidencial Reports

- CA FP : Carrefour Planning IPO of Brazil Unit for First Half 2017: Globo

- CO FP : Carrefour Planning IPO of Brazil Unit for First Half 2017: Globo

- EDF FP : EDF Says U.K. May Need to Take GBP6b Stake in Hinkley Point: FT (Sent Friday)

- EDF FP : Scottish Power CEO Says Hinkley Deal Too Expensive: S. Telegraph

- EDF FP : EDF, CGN May Receive More Than GBP100b Over 35Y for Hinkley: FT

- EAON GY : E.ON CEO Sees Turbulent Uniper IPO, Possible Writedowns: FAS

- EXOR IM : Exor Shareholders Approve Merger Into Dutch Holding Company

- FCA IM : Elkann Says Spoke With Samsung’s Lee on Marelli, Other Topics

- GKP LN : Capital Group Said to Provide $20m to Gulf Keystone: Telegraph

- ISP IM : Intesa Chairman Says Confident Monte Paschi Issue to Be Solved

- KPN NA : KPN Reports Disruption to Dutch Internet Service in Tweet

- LBTYA US : Liberty Media to Buy Formula One Stake: Auto, Motor und Sport

- MKS LN : M&S to Cut About 500 Jobs at London Head Office, Sky News Says

- MON US : Bayer Supervisory Bd May Discuss Higher Monsanto Bid Sep 14: RP

- NG/ LN : N.Grid gas network bid group lines up Balfour Beatty chairman to bolster approach as Borealis pulls out

- NOVN VX : Novartis Gets FDA Orphan Status for Dabrafenib And Trametinib

- NOVOB DC : Novo Nordisk FDA Extends Regulatory IDegLira Review by 3 Months

- ORA FP : Orange Plans to Start Bank in February, Les Echos Says

- PST IM : Italy Sale of 2nd Poste Italiane Stake May Be Delayed: Corriere

- RWE GY : RWE’s Atomic Risk Seen Longer by Paying by Installments: Spiegel

- SAN FP : Sanofi Seeks U.S. Funding in Race to Develop Vaccine for Zika

- SFR FP : Altice Offers 8 Shares for 5 of SFR in Recommended Bid

- SKY LN : CVC Plans GBP1.5b Listing for Sky Bet, Sunday Telegraph (20% own by SKY )

- SPW LN : Scottish Power CEO Says Hinkley Deal Too Expensive: S. Telegraph

- TEF SM : Telefonica Said to Plan Telxius IPO Filing as Soon as Monday

- TEF SM : Telefonica Eyes GBP10b Float of O2 Stake by Yr-End: Telegraph

- TFI FP : TF1 to Restore Profits Via Targeted Advertising, CEO Tells Echos

- TPZ SM : Telepizza 1H Revenue Rises 1% to EU165.6 Million

- UBER IPO : Uber Tried to Buy Lyft in 2014, CEO Kalanick Tells The Economist

- VOLVB SS : Volvo Plans to Start Self-Driving Tests in China Next Year

- VOW3 GY : VW Sued by Ex-Bentley Chief Over Patent Payout: Spiegel

- ZC FP : Zodiac Aerospace Says Operating Income to Miss Street Est.

*ALDERMORE RAISED TO BUY VS HOLD AT DEUTSCHE BANK

*AURUBIS RAISED TO OUTPERFORM VS NEUTRAL AT EXANE

Two conclusions emerged from the Benchmark Lunches this year. The first was that the world was condemned to a prolonged period of slow growth unless vigorous fiscal spending took place in the major industrialized economies. Monetary policy had been helpful in the recovery after the 2008–2009 recession, but its effectiveness as an economic stimulus had diminished. The second was that considering the uncertainties caused by margin compression, limited revenue growth, the U.S. political outlook, terrorism, Brexit and other factors, the fact that the U.S. equity market is making an all-time high is remarkable.

Every year I organize four Friday lunches for serious investors who spend their summer weekends in eastern Long Island. These sessions have evolved over the past 30 years from a single lunch for five people to four lunches in different venues for over 100. Participants include billionaires and academics, hedge fund managers, private equity leaders, corporate chiefs and real estate titans. Leading Republican and Democrat fundraisers interact with each other. The lunches are not social affairs; I actively moderate a discussion of the key issues for almost two hours at each session.

As you might expect, the conclusions of a group like this might serve as a contrary indicator, and sometimes they do. But in August 2001, one participant had warned of a major terrorist attack in the United States during the following year, and last summer a number of attendees thought the appeal of Donald Trump’s message was underestimated and he had a good chance to be the Republican nominee. In any case, those who came to the sessions this year were sufficiently confused that they listened carefully in search of an insight that would help them find clarity in the outlook.

There were three major narratives threaded through the four lunches. The first was how important a factor populism was in the United Kingdom referendum that resulted in the decision to “leave” the European Union. The movement also played a significant role in Donald Trump’s ascendency to the Republican nomination and Bernie Sanders’ surprisingly strong showing in the Democratic primaries. The second was low world productivity, which improved at 1.8% in the 1964–2014 period and was expected to increase .9% over the next 50 years, but was only up half of that recently. In the U.S., productivity was actually down .4% in the second quarter of this year. Profit growth and standard of living increases depend on productivity improvement. The third was “secular stagnation” caused by technology and globalization that has resulted in the slowing of the growth rate of the United States from more than 3% in the period 1945–2007 to a struggling 2% now.

While the initial investor reaction to the Brexit vote was negative, two months later the impact appears to be largely local. The pound has declined more than 20%, asset values in the U.K. are down by 10% and the prospects for a recession in Britain have risen significantly. In Europe, the risk of contagion would appear to have diminished somewhat, although there were some recent murmurings out of Italy, but right after the U.K. referendum, Spain added seats to the establishment party. The French and German elections next year will be important. Overall, the group at the lunches believed that the slow European recovery would continue in spite of Britain’s vote to leave the EU. One knowledgeable observer said that the impact on the world economy may be unnoticeable several years from now. It will take two years from the invocation of Article 50 of the Lisbon Treaty to implement the departure and during that period Britain will negotiate trade treaties that will soften the negative effect of leaving. Both sides will be practical; Europe has too much to lose by trying to punish the U.K. economically. The big issue is immigration. Britain will now be able to make it harder for Middle Easterners to settle and work in their country. Europe will make it harder for British citizens to travel in Europe, but there may be special visas to ease the border difficulties.

We had an extensive discussion at all the lunches about the productivity question. Prominent executives from West Coast technology institutions were participants. Everyone knew that the productivity numbers were disappointing, but many questioned the way productivity was being measured. It was hard to believe that the smartphone with all of its new applications wasn’t adding to productivity. There were a million Uber drivers earning or supplementing their income by providing on-demand transportation; you could do your job from remote locations with great effectiveness; there was almost no information you could not retrieve instantaneously. On the downside, everyone acknowledged that millions of manufacturing jobs had been eliminated through robotics and other forms of technology. The employee attrition problem was likely to get worse as artificial intelligence becomes more prevalent as a tool in the white collar workplace, eliminating jobs in law firms, healthcare and elsewhere. Where will these displaced workers go?

Those worried about productivity and inequality were perhaps not recognizing changes in the “quality” of life. Technology had definitely made our lives easier even if this isn’t reflected in the productivity numbers. Also, someone living in “poverty” in the United States probably has a residence, a refrigerator, television and other amenities not enjoyed by those in poverty in other countries. While this may be true, I do believe that a substantial portion of Americans go to sleep scared every night. They don’t have a job; they have one but it doesn’t cover all their bills; they have a good job but they are worried that business conditions or technology will cause them to lose it. Sanders, Trump and populism generally are products of an insecure population. They feel that their government’s policies have let them down.

Perhaps the productivity problem is not as complicated as we make it out to be. When the economy is growing reasonably rapidly, say at 3% plus, companies are slow to hire new workers and the existing workers produce more. When the economy is growing slowly, say at 2% or less as now, even though technology enables companies to produce more with fewer workers, managers are reluctant to reduce the workforce and productivity declines.

Adding to this problem are the impressive advances being made in healthcare and surgical procedures. Doctors can now perform operations more effectively and more economically than ever before. The result will be that many people will live longer with a better quality of life than any previous generation. Life expectancy is increasing by several weeks a year in the U.S. When you put all of this together you have a larger aging population being supported by a diminishing number of workers who hold jobs that provide incomes that enable them to have a comfortable middle-class life. The inequality problem has grown in the last two decades and may get worse. Stronger growth would help create more well-paying jobs, but the top brackets may earn even more as prosperity improves, widening the inequality gap even further. Improving our educational system could alleviate the problem, but the progress there seems agonizingly slow. Charter schools have been providing encouraging prospects for part of the population, but on-line education had not gotten the traction everyone had hoped for. It wasn’t enough to have a student sit before a screen working on a well-conceived learning program. Teachers to provide guidance and inspiration and other students to foster an academic atmosphere were needed to enrich the experience.

The third theme was “secular stagnation,” a term developed by Harvard professor Alvin Hansen in the 1930s, to describe the prolonged period of slow growth that he thought would follow the Great Depression. He was wrong, but the term has been resurrected by Larry Summers and others to describe the difficulties economies have when they are trying to come out of a recession in which both an economic and a financial decline occurred, as in 2008–2009. Monetary policy was the principal tool used across the world. The United States and others used selected fiscal measures as well, particularly at the beginning, but monetary policy, which requires no legislative approval, was the instrument used most extensively. In 2007 the balance sheets of the central banks of the United States, England, the European Union and Japan had total assets of $3.5 trillion; today, according to Bianco Research, the aggregate is more than $12 trillion. The slow pace of world growth is troubling when monetary policy has been so expansive. But central banks have had no incentive to stop printing it, because inflation has not followed the enormous growth in money. Milton Friedman must be rolling in his grave.

Terrorism continues to be a threat to world financial stability and periodic incidents are unlikely to end. ISIS can be contained but probably not defeated. The Zika problem reminds us that the uncontrollable spread of infectious disease represents a lurking natural terror. The climate change problem is real, but not immediate and it is hard to get policy makers to focus on it, despite rising temperatures and sea levels. Only 50% of the public think this is a serious problem; 16% do not; the rest are undecided. That’s why it’s hard to get governments to act. According to some climate experts, in 200 years most major cities will be in danger, but there is not a sense of urgency that will get world leaders to deal with this problem now.

Almost everyone agreed that the time has come for more fiscal spending on infrastructure, education, job training, research and development and other programs to improve growth and increase competitiveness. One participant knowledgeable in municipal finance pointed out that state and local governments were now amortizing more debt than they were incurring, thereby not investing enough to reduce the infrastructure problem. The companies that are doing well are the “disrupters” like Amazon (ticker: AMZN ), Google ( GOOGL ), Apple ( AAPL ), Airbnb, Uber, Netflix ( NFLX ) and similar companies. The “old economy” companies will continue to face challenges from margin pressure and foreign competition. Excessive regulation is also a problem that limits growth, as does labor union inflexibility. This may have a dampening effect on the market multiple in the long term, but it sure isn’t evident now. There was a feeling in the group that American consumers had enough “stuff” and their spending money on experiences and services rather than goods was having a negative impact on growth.

At each lunch I ask the participants for their views on various asset categories. As the lunches proceeded and the market moved higher there were fewer bears. At the beginning, half of the group thought that the S&P 500 might be flat to down for the year by Christmas and the other half thought it would be up by 10% or more. Few saw a recession brewing before 2018. There were many bulls on gold at one lunch and almost none at another. More people expected the dollar to head toward 1.05 against the euro, but there were some dollar bears (at 1.20) as well. Conviction that oil (West Texas Intermediate) would be above $50 a barrel at year-end was high, while almost no one thought it would be below $40. There was a general feeling that interest rates were headed higher, but nobody thought the move would be large or that it would occur soon. The group slightly favored raising the minimum wage to $12. The consensus was that the current favorable but unspectacular performance of equities would continue. The U.S. was still considered the best place to invest in spite of all its problems, but there was nobody who expressed table-pounding enthusiasm about an investment idea.

As for China, the general feeling was that the economy had picked up some strength in 2016 and the fear of a hard landing had diminished. While the non-performing debt problem was worrisome, it was not likely to bring down the whole economy and there was a sizable minority of investors willing to put money there. Chinese consumers were holding back on their spending because of a lack of government-supported healthcare and retirement programs. Some of the macro people were concerned about strained diplomatic relations between the U.S. and China. Part of this was related to disagreements about territorial rights in the South China Sea and the buildup of military bases there and part to confusion about the Trans-Pacific Partnership. India continues to be the most popular Asian investment, but it is ranked very low in terms of ease of doing business. What was surprising was the increasing interest in the emerging markets, including Argentina, Peru and the Middle East. Nobody, however, had an appetite for investing in Africa.

In the past we could always count on the real estate people at the lunches to provide some optimism. This year their comments were more mixed. The effects of the internet on retailing are significant, having an impact not only on shopping malls, but also on urban retail rentals. Office rentals are still okay, and warehouses are doing well, but there has been some overbuilding of residential condominiums. While apartment rentals continue to be in strong demand, rents are softer. The outlook there is good, however, because we are not building enough housing units to keep up with family formations. If interest rates rise, 3% cap rates won’t look so attractive for commercial property.

Since this is a presidential election year a part of each session was naturally devoted to politics. A number of those attending had been major contributors to the Republican Party in the past. Some of them were supporting Donald Trump. Some were not voting for either Trump or Clinton; a few were voting for Gary Johnson, the Libertarian candidate. Many thought a Trump presidency would put the country at risk. One strong Trump supporter suggested that I not take The Donald’s statements literally. He said they were “metaphors” for what Trump believed. When he says he’ll build a wall with Mexico, he means he’ll do something about immigration. When he says he’ll prevent Muslims from entering the country, he means he’ll be very tight on entry screening. There were a few who expected Trump to be president. Most thought he had hurt his brand by running. When he entered the race more than a year ago, he thought the downside was that his brand would be enhanced whether or not he got the nomination.

Some said Trump might do surprisingly well in the debates because Clinton was so vulnerable. He was likely to hit her hard on her personal e-mail server, her failure to protect the Americans in Benghazi, her performance as Secretary of State, her fundraising for the Clinton Foundation while she was a cabinet officer and her relationship with her husband. Most participants believed Hillary Clinton would be the next president and that the Senate would shift to a Democratic majority by perhaps one vote. The Republicans would lose a number of House of Representatives seats as well, but would retain a majority. Clinton would essentially continue Obama’s center-left policies but there would be no drastic changes out of Washington. That’s perhaps another reason the market has been working its way higher.

As I reviewed my notes for the four lunches, I noted a mood of complacency. The setting was pleasant, the food good and the weather agreeable. All of the attendees had done well in their careers. Some truly frightening possibilities were looming out there, but they didn’t seem imminent. The intermediate future was likely to be like the recent past: lower but positive returns. Let’s see if that’s the way the next year plays out.

For the first time in years, there’s dissension in the ranks of the Barron’s strategists.

Their consensus outlook for U.S. stocks in the remainder of 2016 is mixed and even tinged with a bearish hue. That represents a downgrade from the cautious optimism seen last December, ahead of the coming year.

Their mean expectation for the Standard & Poor’s 500 index is 2138 at year end, below Friday’s close of 2180. Four strategists call themselves bullish, three are in the bear camp, and three are neutral.

In this tug of war, the bulls say the combination of global central bank easy-money policies, improved earnings-per-share growth in the second half, and the continuing search for yield should lead to a happy ending in 2016. The bears, however, contend that rising election uncertainty, a Federal Reserve eager to boost rates, and the market’s high price/earnings ratio could make the rest of 2016 volatile.

With few exceptions, the 10 prominent seers we regularly consult each September and December for an equity-market outlook tend to be an optimistic bunch. In the recent past, the majority often looked for double-digit annual market gains, albeit with the odd bear dissenting. Since this bull market—now the second-longest in history, after that of 1987-2000—sprang to life in March 2009, that has been a winning call.

Downright gloomy these strategists aren’t, and some of the pessimists still look for the market to revive modestly in 2017. But you’d have to go back to the bad old days of 2002-03 to find lower spirits in our biannual polls.

Late last year, the strategists’ mean expectation for the S&P 500 was 2220 by the end of 2016, 10% higher than the key index’s level of 2012 at that time (“Stock Market Outlook 2016,” Dec. 12). While not that bad a prediction, about half of them trimmed their forecasts during the market’s January-February swoon, bringing the consensus forecast down to 2105 in February. At one point that month, the S&P slumped to 1810, down 15% from the previous high of May 2015, and 75% of the way to a bear market.

THE STRATEGISTS’ INDIVIDUAL 2016 year-end targets for the S&P 500 range from 2000 by two participants to 2300 by John Praveen, chief investment strategist at Prudential International Investments Advisors, now the most bullish pundit in this survey.

In interviews last month, we also found an unusual divergence of opinion on another important front: the potential for a rebound in corporate earnings growth in the second half of the year, after drops of 5% in the first quarter and about 3% in the second. The majority expects profit gains to improve, but some believe that has already been incorporated into the S&P 500’s 19% rally from its February lows.

The average of strategists’ earnings-per-share estimates for the companies in the S&P is about $119 in 2016, down from a projected $123.50 last December and $129 in September 2015. That isn’t very different from the bottom-up industry analysts’ consensus of about $118, which is down from $132 some 12 months ago.

The market’s price/earnings ratio has risen markedly, to 18.5 times the bottom-up consensus EPS for 2016 of $118. That’s up from the respective P/E of 16.1 times the then 2015 EPS consensus of $119, twelve months ago. The lower EPS estimate, combined with a market up about 14% since then, are responsible for the higher P/E. Few strategists see the P/E expanding further without a reacceleration in EPS.

The S&P 500 hit an all-time high of 2190 last month, after being range-bound just below its old peak for more than a year. The Dow Jones Industrial Average reached a high of 18,636 on Aug. 15.

Where do our strategists agree? Most expect Hillary Clinton to win the U.S. presidential race. They also think that the Fed will raise rates in December, not at its Sept. 20-21 meeting, and that oil prices have at least stabilized. Chinese growth worries have dissipated, for now. Perhaps most important, a majority also believes that, among global equities, U.S. stocks remain the place to be, given their relative safety versus foreign shares and riskier bonds, plus their relatively good profits in a slow-growth world.

They also agree that corporate earnings will probably stop going down beginning this quarter, after six consecutive quarterly drops, mainly as energy stocks begin to lap their disastrous 2015 declines.

One new wrinkle in their calculus for the market this year is the potential for fiscal stimulus in the U.S., given that the country will hold elections just two months from now. Apart from an earnings rebound, the possibility of tax cuts—which would be a catalyst for the market—can’t be ignored, even if not every strategist thinks such a move is in the offing.

IF THERE’S ONE CLEAR agreement in this survey, it’s that the Democratic candidate is positioned to win the presidency and that such a scenario is the less-bad one for stocks. “Given where the poll numbers are, the market is comfortably expecting Clinton to win,” says Tobias Levkovich, the chief U.S. equity strategist at Citigroup’s Citi Research. He has an S&P 500 year-end target of 2150. Clinton’s policies might hurt one or another sector, such as pharmaceutical stocks, but they are largely known and that means less uncertainty. “It’s status quo, or a third Obama presidential term,” Levkovich maintains.

AND IF THE REPUBLICAN candidate wins? It could be Katie, bar the door—at least at first. There might be an immediate 3% to 5% knee-jerk downturn, the Citi Research strategist says.

Donald Trump’s reputation for shooting from the lip raises anxiety levels for investors, who ordinarily would be expected to plump for a more conservative and business-friendly GOP candidate. “Trump is hard to handicap because he has revealed so little in the way of policy,” says Jeffrey Knight, co-head of global asset allocation at Columbia Threadneedle. He has a year-end S&P 500 target of 2200.

Moreover, Trump’s comments on immigration and trade protection are viewed as unfriendly to the markets. On the positive side, there might be an increased likelihood of a profit-repatriation holiday for U.S. companies, which are holding some $2 trillion in cash overseas, something Trump supports. But that’s probably not enough to outweigh the Goldilocks scenario: a Clinton presidency with the Republicans retaining at least the lower house in Congress.

Investors shouldn’t ignore the congressional races, either, say our strategists. Ironically, while tax reform is a key priority for business, continued government gridlock is often preferred by investors for its lack of surprises. Should a Clinton win be accompanied by a transfer of power to the Democrats in both houses of Congress, fear of higher taxes and stiffer regulation would also probably lead to a market correction.

OUR LATEST SURVEY comes two weeks ahead of the Sept. 20-21 Federal Reserve Open Market Committee meeting, and if there’s one thing that our strategists—and investors in general—got wrong this year, it was the pace of interest-rate increases. Think back to last December. The Fed was embarking on a normalization of rates, raising the federal-funds rate to 0.25%-0.50% from a longstanding 0%-0.25%.

The fed-funds rate—the overnight lending rate that banks charge one another for funds maintained at the central bank—helps shape the short end of the bond-market yield curve. Monetary stimulus in the form of Fed asset-buying and ultralow interest rates has been an important catalyst for higher stock prices in this lengthy bull market.

It’s perhaps hard to believe now, after the market swoon of 15% from all-time highs in the first part of the year and the United Kingdom’s surprise vote to leave the European Union, but last December investors expected the Fed to push rates up to 1% or more this year. As it happened, there have been zero increases in 2016, leading to the “lower for longer” prediction by bulls about rates.

“The strategic surprise of the year,” adds Knight, is that the Fed seemingly has moved to a more gradual rate-hike path from that expected at the end of 2015. In the face of the market volatility early in 2016 and Brexit, “the Fed blinked.”

“More like lower forever,” quips Stephen Auth, chief investment officer at Federated Investors, referring to the central bank’s rate strategy. Given global deflationary trends and a world in which many important economies, including that of the U.S., haven’t enacted the structural reforms necessary to return to expansion, Auth observes, “we are in an environment where rates are unlikely to reach past cyclical highs. The Fed is handcuffed.”

Once our most optimistic forecaster, Auth has pulled in his horns temporarily. His year-end S&P 500 target currently is 2100. Last December, his prediction was a robust 2500, but in February he cut it to 1850. Now, Auth has pushed out his 2500 target to year-end 2018. “What’s changed is our view that U.S. and global growth would reaccelerate. That’s off the table,” he says. China’s economy is expanding relatively slowly; Brexit has raised concerns about European growth; and the U.S. is just plain slow, he notes.

Economists at the 10 institutions in this survey expect an anemic 1.7% U.S. expansion this year and not much better in 2017. “The growth picture isn’t great, but it’s healthy enough. Earnings will grind it out,” adds Auth.

The fear among bears in this group is that even a small and gradual rate rise by the Fed could upset the apple cart. There’s investor complacency concerning bond yields, argues Dubravko Lakos-Bujas, chief U.S. equity strategist at JPMorgan.

GLOBAL YIELDS ARE at all-time lows, and stock market expectations “are contingent on yields staying extremely low.” Interest-rate-sensitive stocks—consumer staples, utilities, and telecoms—have been leaders of the 7% market rally this year. The fear is that if yields move higher, these sectors will derate and cause a market pullback, Lakos-Bujas adds.

Russ Koesterich, head of asset allocation at the BlackRock Global Allocation fund, concurs. In their relentless search for yield, the “bond market refugees” have turned to defensive sectors, such as staples and utilities, for good dividend yields and the perception of safety. “These stocks have done well, but it is only sustainable if you believe the 10-year Treasury yield will be permanently stuck where it is today,” he says. “You don’t need much of a rise in rates to see a big move [down] in the stocks. It’s a very tight relationship.”

The JPMorgan strategist, who has a 2000 year-end target on the S&P 500, down from 2200 last December, points to the market’s quick drop on Friday, Aug. 26, as an example of what could happen if rate expectations are disappointing. That day, stocks slid 1% in roughly 30 minutes following comments by a Fed official that a rate increase in September was still possible.

TIGHTER FED POLICY is one of the reasons David Kostin, Goldman Sachs’ chief U.S. equity strategist, believes that by year end, the market could be in for a “drawdown, not necessarily a correction,” from current levels. Kostin, whose year-end target is 2100, adds that there is probably a higher potential now for a September rate hike than the market expects.

Lately, the word “correction,” or a 10% drop in the market from its highs, has been uttered more times than is typical among our strategists. In addition, election uncertainty and punk earnings growth this year, slowing corporate share buybacks, and high valuations make the Goldman analyst cautious.

Says Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch: “We do see a sizable probability of a correction” in the coming months. She has a 2000 year-end target. Besides election uncertainty, she notes that market valuations are expensive versus their historical levels, underlying sales growth is at a three-year low, and Chinese economic expansion might be disappointing.

There is a view among some market participants that as monetary stimulus ends, fiscal stimulus will take the rally’s baton, she says. But, she argues, expectations for this are too high.

Comments JPMorgan’s Lakos-Bujas: “Increased discussion of coordinated fiscal stimulus among the developed nations would make me more constructive on markets…but so far, that’s just high hopes and nothing concrete.”

Both Subramanian and Lakos-Bujas believe bottom-up industry analysts’ EPS consensus forecasts for 2017 will prove too high. Profits are improving, but not at the rate that the Street is predicting, Subramanian says.

THE BULLS BEG TO DIFFER, at least when it comes to 2016’s second half. From a mathematical point of view, earnings almost have to improve, if only because energy-sector profits should stop being a huge drag, notes Prudential’s Praveen. In fact, oil-patch earnings comparisons should turn positive in the fourth quarter.

The U.S. equity market is the world’s best, as EPS expectations are “pretty achievable” for the next two quarters, contends Adam Parker, head of U.S. equity strategy at Morgan Stanley. At $122.70, he has the highest EPS estimate in our bunch. Last December, Parker had a base-case S&P 500 index target of 2175 for 2016 and his new target for mid- 2017 is 2200, assuming about 4% EPS growth.

Compare that with the rest of the world, where profit growth is in decline, he says. His bull-case scenario is for an S&P 500 level of 2475 in 12 months if EPS growth accelerates to 6%, as investors aren’t positioned for such an improvement, according to Parker.

Equities offer a better risk-reward proposition than bonds, he argues. An investor gets modest earnings growth, 2% return through share buybacks, an over-2% dividend yield, plus a “call option” on the possibility that earnings can grow, the Morgan Stanley strategist avers. Among the stocks that Parker likes are Biogen (ticker: BIIB) and NextEra Energy (NEE). (See table below.)

Stocks are cheap relative to bonds, Prudential’s Praveen says, citing the earnings yield gap, another traditional valuation method. The earnings yield, the inverse of the P/E ratio, is now 4.9%, based on a trailing 12-month EPS P/E ratio of 20.5 times. That towers over a yield of 1.6% on the 10-year Treasury bond. The 3.3 percentage-point spread has narrowed from 3.76 points in mid-December, but it remains significantly wider than the 1.4-point average of the past 20 years.

PRAVEEN, WHOSE YEAR-END target of 2300 is the highest in our survey, says a combination of global central bank liquidity, improved EPS growth, investors’ appetite for yield, good consumer-spending growth (at 3.5%), and a rise in investment spending should push the market higher. The last will start to see the drag from energy investment abate and will benefit from inventory rebuilding, adds Praveen, who expects EPS growth of 1% in the third quarter and 8% in the fourth.

That earnings gains will ratchet up in the second half of 2016 isn’t much in dispute. The question is: Has the market already discounted 2016’s improvement, and will 2017 EPS growth disappoint?

AMONG SECTORS, our market pundits still bet on technology to be a winner, a perennial view, both for attractive profits in a low-growth world and relatively low valuations.

Says Federated’s Auth: “All the talk of a new technology economy back in 1999 was premature. But now it’s coming to pass.” Given the high valuations already in staples and utilities, if the market goes higher, it will in part have to go through technology, adds Auth, who lists Alphabet (GOOGL), the parent of Google, as one of his favorite tech picks as well as telecom Verizon Communications (VZ) and health-care stock AbbVie (ABBV).

Goldman’s Kostin likes sectors that he believes are set to grow irrespective of the economy, such as health care. That’s another preferred group among our strategists, because valuations have dropped in the face of political controversy over drug pricing, and the group’s growth profile remains relatively robust. One of Kostin’s picks is biotech company Amgen (AMGN).

HEALTH CARE REMAINS a controversial sector, and problematic for some strategists, who fear that a Clinton presidency or a rising tide of populism could lead to strict drug-price regulations.

This sector is down 5% since July 2015, making it the worst performer in that period, and BofA Merrill Lynch’s Subramanian says the group’s valuation is back to where it stood during the Bill Clinton health-care-reform scare, back in the 1990s. “What’s priced in is a pretty dramatic upheaval,” she says, “but what [reform] might get done is probably of lesser magnitude than the market is discounting.”

Energy stocks, after their 32% drop since mid-2014, are now almost as favored as tech—unsurprising, given their low stock prices and that oil appears to have stopped its free fall. The sector is an overweight for Jonathan Glionna, head of U.S. equity strategy at Barclays Capital. Easier quarterly earnings comparisons lie ahead, he says. The brokerage expects oil prices to rebound, bolstering energy-sector earnings.

THE MOST HATED GROUP is consumer staples, up 8% this year. As mentioned, as bond proxies with high valuations and low growth, these stocks could drop sharply as interest rates rise.

Stocks have been a challenge for actively managed funds. A recent JPMorgan report says some two-thirds of U.S. fund managers are underperforming their relevant benchmark this year. It isn’t going to get easier.

Our strategists note that their targets could be buffeted by wild cards, such as election surprises or Fed rate moves that are more hawkish than the market expects. Additionally, weakness in China or further post-Brexit turmoil in Europe, both economic and political, could have a negative impact. Separatist moves are growing there. And then there is the frail recovery in the energy sector.

Even some bears concede U.S. stocks are a better buy than bonds at this point, but the Street’s strategists aren’t as bullish as they used to be. The contrarian wag in us would like to take that as a signal to take the opposing view. However, as the market enters September, historically its most dangerous month, standing near an exit might be prudent.

Cover story: According to Barron's strategists, the "consensus outlook for U.S. stocks in the remainder of 2016 is mixed and even tinged with a bearish hue," a downgrade from optimism at the beginning of the year-though pundits are more upbeat on 2017.