The gains have been too good to be ignored recently, and if the right developments for the economy occur, they are likely to grow substantially from current levels.
increased its 2021 price target for the
to $ 4,300 from $ 4,200 on Tuesday. This means that strategists see the index gaining more than 11% at the end of the year compared to the current level. This is not even an aggressive prediction in relation to the prevailing view on Wall Street. The average call among companies tracked by FactSet is for the index to reach $ 4,400.
But optimism has real merit. “With the economy reopening, the abundant stimulus and the Fed’s policy extremely accommodating, it’s no surprise that the 2021 GDP should be hotter than at any time in the past 35 years,” wrote Jonathan Golub, chief share strategist Credit Suisse in the USA in a note.
He argued that as fourth quarter aggregate earnings per share for companies on the S&P 500 exceeded analysts’ forecasts by 17%, with the vast majority of companies reporting their results, profit estimates are expected to increase.
Higher expectations of earnings generally lead to higher stock prices. Golub raised its aggregate macro-based estimates to S&P 500 EPS to $ 185 from $ 175 in 2021, and to $ 210 from $ 200 in 2022.
Initially, investors didn’t seem to care that companies were confusing fourth quarter earnings expectations. The results did not matter, the reasoning was, because if Covid-19 vaccines could not be launched on time or could not be properly immunized against new strains, local economies would not be able to reopen and the gains would collapse.
But now, vaccines are finding millions of weapons a day and trillion dollars of additional fiscal stimulus that would support demand are expected. Earnings estimates for the current quarter were below the expected result for the fourth quarter just a few weeks ago, so it’s not surprising to see Wall Street increase them as Covid-19-related restrictions are lifted. Strategists, on average, currently see the EPS of the S&P 500 reaching $ 198 for 2022.
The next question is at which earnings per share multiple the average stock in the S&P 500 is likely to trade. Golub sees the index trading at just over 20 times the aggregate earnings of 2022 by the end of this year. This represents a drop from expectations of earnings of approximately 22 times for the next 12 months today.
Lower valuations are widely expected because yields from the US Treasury’s secured debt are increasing. Higher yields make the risk of being in stocks less and less attractive by reducing the amount that investors are willing to pay per dollar of future earnings.
But rising rates also reflect improved expectations for the economy and inflation, which is consistent with better gains that could drive stock prices up.
None of this means that there are no risks. Any major setback in vaccinations would be detrimental to profits and a decision by the Federal Reserve to raise interest rates too early would be a risk to the economy and stock prices.
Still, the risks are decreasing. The earning potential can be constructed as the shares are under pressure in the current liquidation.
Write to Jacob Sonenshine in firstname.lastname@example.org