Where are stocks headed? 6 potential game-changers

ByABC News
August 7, 2012, 5:44 PM

NEW YORK -- Even in normal times, Wall Street stock market forecasts lack precision. These are anything but normal times, what with the eurozone at risk of breaking apart, the U.S. teetering on the edge of the "fiscal cliff" and Democrats and Republicans locked in an election-year feud about how to revive the U.S. economy.

Given all the uncertainties, the unpredictable outcomes and the unending list of what-ifs facing investors, it's no surprise that drawing an accurate road map to where financial markets are headed the rest of the year is no easy task.

Count Laszlo Birinyi among the Wall Street players who admit to having a lower degree of confidence in accurately predicting where markets are headed next. Birinyi, president of investment research firm Birinyi Associates, was bullish at the start of the year. And he's still upbeat on the outlook for stocks, saying the Standard & Poor's 500 index could climb to 1500 by year-end, or 7% above Tuesday's close of 1401.35.

But, at the same time, he remains "cautious." The caveat? The risks hanging over the market are too tough to accurately handicap or quantify in a spreadsheet.

"There are too many variables which are beyond our capabilities to absorb and forecast," Birinyi says. One of the most difficult things to gauge is how the eurozone's sovereign debt and banking crisis will play out.

But a lack of visibility doesn't mean investment strategists haven't come up with scenarios that could cause stocks to climb or crater in the second half of 2012. U.S. stocks have rallied nearly 3% in the past three sessions and are now up 11.4% this year despite all the global headwinds.

Optimists such as Jim Paulsen, chief investment strategist at Wells Capital Management, bet Europe won't blow up, the Chinese economy won't cool too much and the recent U.S. soft patch won't morph into recession. Also, stock prices relative to earnings are attractive, with the market trading at 13 times 2013 earnings forecasts, below the longer-term average of roughly 15. Paulsen also believes a year-end target of 1500 is a "reasonable expectation" for the S&P 500.

But skeptics such as Joe Kinahan, chief derivatives strategist for TD Ameritrade, say stocks could face downward pressure if things don't play out in a market-friendly way. "It's time to be very cautious. There are so many headwinds."

What'll determine if the market bounces or burns? Here are six potential game-changers in the second half:

1. Fed: Stimulus or no stimulus?

There is a lot riding on whether the Federal Reserve, led by Chairman Ben Bernanke, will ride to the rescue of markets again by injecting monetary stimulus into the financial system to try to jump-start the economy and boost hiring.

(Investors are hoping for similar moves from central bankers in Europe and the Chinese government to bolster their economies.)

Bernanke has repeatedly said the Fed is prepared to act to boost growth if the pace of economic activity shows little signs of picking up on its own. Since 2009, the stock market has responded favorably to the Fed's innovative programs to ease financial conditions. The Fed's arsenal has included bond-buying programs, as well as pledges to keep short-term rates near 0% until late 2014.