Strategists Predict 11% S&P 500 Gain In 2011

(Bloomberg News) Rising profits and cash balances will push the Standard & Poor’s 500 Index to the biggest three-year advance since the 1990s, surpassing forecasts for below-average returns, strategists at Wall Street’s biggest banks say.

The benchmark gauge for American equities will rise 11% to 1,379 in 2011, bringing the increase since 2008 to 53%, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.’s David Kostin, the most accurate U.S. strategist this year, said sales growth will spur a 17% rally in the S&P 500 through the end of 2011.

Market analysts say earnings will hit record highs, keeping valuations below historical averages at the same time government spending aids the economy. Reaching their average forecast for 2011 would give the index annualized gains of 15% over three years, twice the rate anticipated by Pacific Investment Management Co.’s new normal theory that anticipates deficits and increased regulation will limit returns.

“Your new normal may not be quite so new,” said Barry Knapp, the New York-based head of equity strategy for Barclays Plc, who expects the S&P 500 will reach 1,420. “There’s nothing to worry about with earnings. We’ll get some margin expansion, and we’re still at a pretty good stage in the economic cycle. From my perspective, I’ve tried to think about all the risks. I just think the outlook is favorable, so favorable that I struggle to see how the equity market doesn’t perform well.”