Market Strategy 8/02/2021
- August 2, 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.
Ultimately the stock market is broadly dependent on economic growth to drive revenues and earnings across the sectors.
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.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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