Pros see stocks up in 2012, but big risks, too

NEW YORK (AP) - The good news is that Wall Street experts think stock prices will rise more than 10 percent next year.

The bad news is that they expected big gains in 2011 and got nearly zero instead.

It's forecasting time on Wall Street, and once again the pros are trying to predict the unpredictable. History suggests their target price for stocks by the end of 2012 will prove too high or too low. They might even get the direction wrong - predicting a gain when there's a loss.

"Normally, you wonder, How will sales do? How are managements doing?" says Howard Silverblatt, senior index analyst at Standard & Poor's, which puts out its own forecasts.

"Now there are so many high-level issues that affect the market."

Silverblatt's firm says the S&P 500 index should rise to 1,400 by the end of 2012, up more than 10 percent from Friday's close of 1,265. That figure is an average of expectations from investment strategists, economists and other big thinkers. More bullish yet are stock analysts focused on individual companies. Add up their price targets for each stock in the index, and they see it rising to 1,457, up 15 percent.

There's plenty of reason to think stocks will rise fast in the coming year. U.S. companies are generating record profits. Americans are spending more than expected and factories are producing more. The job market finally appears to be healing, too.

The odds of the U.S. slipping into another recession have fallen since the summer, when the economy had slowed.

Stocks seem attractively priced, too. The S&P 500 is trading at 12 times its expected earnings per share for 2012.

It typically trades at 15 times, meaning stocks appear cheaper now.

Binky Chadha, chief strategist at Deutsche Bank, says the S&P 500 could hit 1,500 by the end of 2012, a gain of more than 18 percent.

Still, there is worry amid the bullishness.

Michael Hartnett, chief global equity strategist at Bank of America-Merrill Lynch, expects the S&P to close next year at 1,350, up 6.7 percent from Friday's close.

He thinks the U.S. will avoid recession and U.S. companies will generate decent profits.

What could wreck that prediction is a worse situation in Europe than he is expecting.

If European leaders move too slowly to solve their government debt crisis, the region could fall into a deep recession and throw the U.S. into one, too.

If Europe tanks, profits will drop sharply and push the S&P down to 1,000, he says. That would be a sharp drop of 21 percent from Friday's close.

The frightening part is that Hartnett gives this "bear" case four-in-10 odds.

Similarly, Barry Knapp, strategist at Barclays Capital, predicts the S&P will rise to 1,330 next year. But he expects Europe's struggles with its debt and Washington gridlock could lead investors to sell before they buy.

He says the S&P could fall to 1,150 by the middle of the year before rising to his target.

Then again, you might do better investing in the opposite kind of companies, like makers of toys and other consumer discretionary goods.

Their profits tend to zoom up and down with the economy.

A report from S&P Capital IQ notes that stocks of cyclical companies such as these tend to gain the most after market drops like the one in October, when stocks fell nearly 20 percent.

In the five times that the S&P 500 has fallen between 15 percent and 25 percent since 1978, consumer discretionary stocks have risen an average 30 percent in the next six months, according to S&P.

Those stocks are up 16 percent since their Oct. 3 lows.

One reason it's difficult to guess future stock prices is that figuring out where the economy is heading isn't so easy either.

In December 2007, economists expected the economy to grow an average 2.4 percent in 2008, according to a survey of three dozen of them by the Federal Reserve Bank of Philadelphia.

It shrank 0.3 percent instead. For 2009, they forecast the economy would shrink 0.8 percent. It shrank 3.5 percent.

Economists were more accurate the next two years.

However, not by much.

Now they say the economy will grow 2.2 percent next year.