Market Strategy 8/02/2021
Best to Keep Expectations Right-Sized
In a year of super favorable comparisons volatility and uncertainty are likely to persist even as things get better
Key Takeaways
- We are adjusting our price target for the end of 2021 for the S&P 500 index to 4,700 on earnings of $196. Our previous target, set in December, was 4,300 on earnings of $175. Our new price target assumes a multiple of 24x earnings, down from 24.6x previously.
- Q2 earnings season enters the home stretch with 151 companies scheduled to report this week. To date with 59% of companies having reported, earnings are up 50.7% from a year earlier on revenue growth of 10.9%.
- Earnings projections are rising strongly consistent with past economic recoveries albeit with outsized performance on a comparable basis.
We are adjusting our year-end target for the S&P 500 to $4,700 from $4,300 (initiated on December 14, 2020). Our new upwardly adjusted target price suggests some 7% upside from where the benchmark closed on Friday, July 30 at $4395 to the end of the year.
We raise our earnings projection for the S&P 500 in 2021 to $196 from $175 based on current corporate revenue growth and earnings trends supported by the process of economic re-openings stateside and around the world even as the pandemic and virus variants persist and the rebooting of the global supply chain remains uneven.
Our price target and earnings projection is based on a number of assumptions including: continued success toward stemming the pandemic and an increase in distribution and use of vaccines of efficacy in response to Covid-19 variants. We expect monetary policy to remain supportive of the US economy leading to further improvement of economic and corporate fundamentals as the US and other countries around the world move from pandemic oppression toward a global economic recovery.
Additional stimulus in the form of a $550 billion traditional infrastructure program currently being negotiated in the Congress could add significant support to the outcome of the recovery in the US.
We reiterate our overweight to US equities while maintaining meaningful exposure to international developed and emerging markets. We remain overweight cyclical sectors over defensives and remain diversified across market capitalizations with a barbell that incorporates both growth and value styles. Our barbell approach is illustrated by our Outperform-rated sectors: information technology, consumer discretionary, financials and industrials.
A low interest rate regime supported by accommodative monetary policy from the Federal Reserve along with stimulus tied to traditional infrastructure (roads, bridges, etc.) should provide policy support to the economy. In addition, underlying secular trends embedded in technology (robotics, algorithms) and globalization provide counter inflationary offsets to much-needed reflation to boost economic activity back to pre-pandemic levels. In aggregate these should provide support to equities with manageable levels of inflation and with a modest rise in market interest rates to move the economy toward “the next new normal.”
A continuation of the recent broadening of investor appetite for stocks seen since last September among professional and private investors is likely to persist so long as inflation and interest rates prove moderate and manageable as expected by the Federal Reserve Board. Ultimately the stock market is broadly dependent on economic growth to drive revenues and earnings across the sectors.
In our view economic data and corporate revenue and earnings results thus far this year suggest the US will continue to progress in its recovery from the pandemic emergency and move toward a sustainable economic expansion of moderate growth that leads the world by virtue of demand generated by the US consumer as well as innovation by US corporations.
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation.
Investment Strategy should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2020.