By Caroline Valetkevitch
NEW YORK (Reuters) - A weak ending to 2015 and the expectation of improving profit growth in 2016 will set the stage for a single-digit gain in U.S. stocks next year, a modest forecast at least by recent standards, according to strategists polled by Reuters.
But even that fairly circumspect outlook faces significant risks, including rising U.S. interest rates and a lackluster global economy, the strategists said.
The S&P 500 is forecast to end 2016 at 2,207, up 10 percent from Friday's close of 2,012.37 and 5 percent higher than where it is expected to round off this year, according to the median forecast of 46 strategists polled by Reuters in the past week.
Strategists were similarly enthusiastic a year ago, when a similar poll pointed to expectations for an 11.5 percent rise in the S&P 500 for 2015.
With just three weeks left in 2015, the S&P 500 is down a little over 2 percent for the year. Strategists forecast it will rally into year-end to 2,100, up 2 percent from 2014.
Even then, that would be the smallest annual increase for the index since 2011, when it ended virtually unchanged.
"We think the (bull market) is going to continue but we're later into the cycle, so the returns we're expecting are lower than what we got earlier in the cycle," said Jill Carey Hall, equity and quant strategist at Bank of America Merrill Lynch (N:BAC) in New York.
She and other strategists pointed to a likely improvement in earnings growth next year as a source of strength.
S&P 500 earnings are expected to increase 8.3 percent next year, up from just 0.3 percent growth slated for this year, according to Thomson Reuters data. The S&P 500's forward price-to-earnings ratio stands at 16.7, still above the historic mean of about 15, based on Thomson Reuters data.
"We think S&P 500 upside will be closely linked to earnings growth delivery," J.P. Morgan strategists wrote in their 2016 outlook, adding that energy will be less of a drag as long as oil prices keep from falling further.
Still, strategists in the poll said the first U.S. interest rate hike in nearly a decade will create further volatility in the market, even if most investors have priced in a move for when the Federal Reserve ends its policy meeting on Wednesday.
If the Fed raises rates faster than investors expect, that will hit consumer and business spending, they said. It will also likely boost the dollar, which has been a drag on U.S. exporters' performance.
Respondents cited slower growth in China as among the biggest global worries for U.S. stocks in 2016, along with further Middle East turmoil and more terror attacks.
Yet many strategists expect some U.S. growth-oriented stocks, including financials, will outperform. The S&P 500 financial index is down about 5 percent for 2015 so far.
"Earnings in the financial sector could surprise to the upside next year. Rising rates generally give them wider spread income, which in this environment should pretty much go straight to the bottom line," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
The Dow Jones industrial average is forecast to rise to 18,975 by year-end 2016, about 10 percent higher than Friday's close of 17,265.21. The Dow is forecast to end 2015 at 17,883.
