Wall Street targets drop as reality sinks in

By Ellis Mnyandu

NEW YORK (Reuters) - The realization that the U.S. economy faces serious headwinds is wearing Wall Street down and strategists are finally being swayed to trim their end-2008 targets for benchmark indexes.

Wednesday's market rally notwithstanding, Wall Street's forecasters are taking a cautious stance given that it's only three weeks into the new year and January appears on track to being one of the worst months on record.

Citigroup was the latest to cut its year-end targets for the S&P and Dow on Wednesday, following a drop in S&P earnings estimates from Bank of America a day earlier. While Goldman's Sachs Group's widely followed Abby Joseph Cohen is sticking with her estimates, she is still expressing caution about 2008.

Citigroup cut its targets for the benchmark S&P 500 .SPX and the blue-chip Dow Jones industrial average .DJI, saying profit growth was unlikely to underpin equities in the near term as concerns mount about a recession.

"The stock market is having a difficult time digesting that we are moving into a much slower year here," said Steven Sheldon, director of SMS Capital Management in Houston, Texas. "I'm surprised it's taken this long to see targets lowered."

At Wednesday's close, the S&P 500 was down 8.8 percent year-to-date, while the Dow was off more than 7 percent as recession fears diminish investors' appetite for riskier assets.

The Nasdaq .IXIC, on the other hand, is down more than 12 percent since the start of 2008, a slide that has seen it dip and then recover from a level that typically marks the onset of a bear market.

Even so, the pace at which Wall Street's expectations for where indexes might end 2008 has lagged the market's tumble, leading some analysts to worry that before too long, a dose of reality might worsen the market's slide.