The top share index <.FTSE> is seen falling another 2 percent by mid-2012 as worries surrounding the euro zone debt crisis and anaemic global growth crimp equities, a Reuters poll found.
Median forecasts of around 20 equity strategists in a survey taken over the past week predicted the FTSE 100 would trade at 5,400 by mid-2012, having closed up 3.2 percent at 5,505 on Wednesday.
Global indexes rallied on Wednesday after top central banks around the world announced co-ordinated steps to prevent a credit crunch among banks in Europe that are struggling with the region's debt crisis.
The poll result was lower than predicted in a September poll, which showed the FTSE reaching 5,550 in mid-2012 and dramatically below the 6,300 predicted in a June poll.
The main headwind with respect to the 2012 stock market outlook would normally be a fairly straightforward process, however the European sovereign debt situation will be, and is, a massive cloud to the overall economic outlook, Michael Hewson, market analyst at CMC Markets.
Hewson said a quick solution could see a rally towards recent highs around 5,600, but the likelier outcome would be more uncertainty and we haven't even talked about the nuclear option that a euro zone break up would have on markets.
The Organisation for Economic Cooperation and Development issued a stark warning on Monday, saying the euro zone's debt crisis has become the biggest threat to the global economy and a break up of the currency zone can no longer be ruled out.
The blue chip index has fallen nearly 7 percent so far in 2011, as politicians have failed to put in place measures to stem the contagion raging through the euro zone that has claimed the governments of Greece, Italy, Spain, Portugal and Ireland.
The FTSE volatility index <.VFTSE>, a gauge of investor fear, has fluctuated massively this year, while bond yields of Italy and Spain, thought too big to save, have climbed to unsustainable levels.
Riskier assets such as the heavyweight banks, which tend to drive the market, have been among the worst hit, down around 30 percent in 2011, as investors have fled the sector on concerns over the strength of their balance sheets given their exposure to Europe's debt crisis.
Ratings agency Standard & Poor's cut its ratings on 15 major lenders including part state-owned UK lenders Lloyds Banking Group
Ultimately the excessive debt overhanging developed economies will have to be written off and this will be horrific and deflationary, David Morrison, market strategist at GFT Global said.
Expectations for corporate earnings are currently too high and will soon be revised down sharply on profit warnings as consumers hunker down. This should put a lid on rallies going into 2012.
Economists recently polled by Reuters said there was now a 60 percent likelihood of a recession in Europe and 40 percent chance of one in the UK.
Miners too have succumbed to heavy selling, more than a third lower so far this year, as global debt problems and government steps to tackle swelling debt piles with austerity measures have crimped growth and weighed on corporate earnings.
With the global economy running out of steam analysts have been revising down growth forecasts for 2012, while earnings momentum remains in decline.
According to Thomson Reuters data earnings momentum -- analysts' upgrades minus downgrades as a percentage of total estimates -- for FTSE 100 companies is -8.3 percent, versus -10.8 percent a month ago.
HOPE FOR END-2012
The benchmark index, however, is expected to rise 1.7 percent from now until the end-2012, as it is hoped politicians take steps to calm the market's nerves over contagion in Europe and growth begins to return to developed economies.
(By end-2012) I feel we would have priced what is going on in Europe and be on the path to re-structuring. We should also see some signs of economic growth and a fall in unemployment levels, Manoj Ladwa, senior trader at ETX Capital, said.
That would leave the FTSE trading at very attractive valuations, traders said, having been savaged in the wake of Europe's debt problems.
The FTSE 100 trades on a price to earnings ratio of 9.86 times, compared with a historical average of around 14 times, while it has a combined price-to-book ratio of 1.4, Thomson Reuters StarMine data shows.
Some of the contributors to previous polls refrained from giving forecasts this time round, or have them under review, blaming the recent market volatility.
Reflecting the lingering doubts over the global economy, traditional defensive stocks, those perceived as being able to perform well through austere economic periods and those that offer investors reliable returns continue to outperform.
(Additional polling by Ashrith Doddi and Sumanta Dey; Editing by Jon Loades-Carter)