Centerpoint Energy Inc. led utilities stocks to a 13% rally, pushing the group’s multiple to 17, while health- care shares such as Celgene Corp. and Boston Scientific Corp. gained 16% to reach the industry’s highest price relative to income since February 2008.
The valuations signal danger after investors pulled more than $400 billion from U.S. stock mutual funds between 2009 and 2012, said Jonathan Golub, UBS AG’s chief U.S. equity strategist. While about $18.4 billion was sent to those funds in January, the deposits shrunk to $1.1 billion for February and March, according to the Investment Company Institute.
“When you have the market being led by defensives, it’s not a positive sign for a continued rally,” he said in an April 3 phone interview. “The market’s gotten ahead of itself.”
Golub predicts the S&P 500 will fall 8.3% to 1,425 by the end of the year. His forecast is below the 1,583 average of 17 Wall Street firms tracked by Bloomberg. At this time last year, he was calling for a 3.9% increase in the gauge, making him the most bullish strategist.
Stocks fell 9.9% from April 2 through June 1 last year, before the S&P 500 surged to a record last month. In 2011, the index slumped 19.4%, its biggest decline of the bull market, then recovered to end the year within a point of where it started. The 2010 drop started April 23, with the index declining 16% through July.
This year has been “strikingly similar” to the last three years and investors are bracing for losses, according to Brian Belski, the New York-based chief investment strategist at BMO Capital Markets.
“While strong gains at the open of 2013 have helped most U.S. indices reach historical heights, the rally to date has been met with more skepticism than acceptance,” Belski said in a March 28 report. “The stage is likely set for at least a respite to the market’s ascension.”
He projects the index will end 2013 higher as earnings continue to expand. BMO’s 1,575 projection would represent a 1.4% advance from last week and a 10% rally for the year, according to data compiled by Bloomberg. Belski held his 2012 bullish call through the April-to-June decline last year. He said in October that corporate fundamentals were in “excellent shape” and in December that multiple expansion would lead stocks higher.
The rally has left the S&P 500 trading at 15.3 times reported earnings, higher than it was in April the last two years, Bloomberg data show.
“Now’s the time to wait and see,” said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., which oversees about $681 billion, said in an April 4 phone interview. Joy predicted gains for equities in December as housing and manufacturing improved. “There’s no question the cyclicals are cheaper. The question is, when do they take over the leadership?” he said. “I wouldn’t be terribly aggressive.”