To Bank of America Corp. equity strategist Savita Subramanian, the forces that torpedoed blue chip U.S. stocks last week may be the same ones that pull them back up.
U.S. equities joined foundering currencies and commodities around the world as the Standard & Poor's 500 Index tumbled 5.8 per cent and the Dow Jones Industrial Average entered a correction. Until now, U.S. stocks had been a pool of tranquillity amid a slowdown in China, oil's 60-per-cent plunge and geopolitical wrangling in Europe.
While slowing global growth is behind the anxiety, it's also a potential reason for optimism about the biggest S&P 500 companies, with the U.S. economy outpacing its peers, according to Ms. Subramanian. Profits in the index, which are falling now, are projected to rebound 10.5 per cent in 2016 and 12.8 per cent in 2017, analyst estimates compiled by Bloomberg show.
"When Europe and China eclipse the U.S. we chug along, but when they're in a down market, that's when the U.S. really dominates," Ms. Subramanian said in a phone interview. "From a quality perspective, all the boxes are checked off in the U.S. and that becomes more important to investors again."
U.S. gross domestic product rose at a 2.3-per-cent annualized rate in the second quarter, according to Commerce Department data reported on July 30. From the end of 2011 to the end of 2014, a period when the S&P 500 climbed 64 per cent, the economy expanded at a 2.1-per-cent clip.
Losses earlier in the week in U.S. shares were limited as the rout in emerging-market assets deepened, with developing-country equities sinking to the lowest level since 2009 and currencies from Malaysia to Kazakhstan tumbling. That changed Thursday as the S&P 500 wiped out gains for 2015 as investors sought the safety of gold and Treasuries.
The stocks that have meant the most to U.S. investors have been swept up in the turmoil. Netflix Inc., Facebook Inc., Amazon.com Inc., Google Inc. and Apple Inc. have seen $139-billion (U.S.) in market value erased over two days.
It's those shares investors should turn to now more than ever, according to Jonathan Golub, the chief strategist for RBC Capital Markets LLC.
"The one thing they have in common is none of them need a stronger economy to generate their revenues," Mr. Golub said by phone. "They're companies that are innovating and taking market share and in a slow global growth environment. Those characteristics are the whole market story."
The S&P 500 will rally 12 per cent to 2,233 by year-end, according to the average estimate of Wall Street strategists surveyed by Bloomberg. Mr. Golub, who predicts the benchmark will go ever higher than that and land at 2,325, is joined by Thomas Lee, who sees the gauge ending at the same level. Ms. Subramanian has a year-end forecast of 2,200.
"China has been a weak story for a while," Mr. Lee, managing partner and co-founder of Fundstrat Global Advisors LLC, said by phone. "We're getting to the point where the market is going to start looking for the fact that everyone is finished selling. I think that means we're within days of a low."