S&P 500 to 4050 by Year-End 2021, 12.2% upside
We are initiating our 2021 S&P 500 price target of 4050, representing 12.2% upside from current levels (10.8% annualized). This is based on EPS of $168 in 2021 (previously $155), and $190 in 2022 (previously $170). These estimates imply EPS growth of 20% and 13% in 2021-22. Our target suggests multiples will contract from 21.9x today to 21.3x by year-end 2021, as earnings grow into currently elevated multiples.
Forecasting Returns – The Art of Predicting the Future in the Future
Our 2021 forecasts are designed to answer a simple question: what will the future (2022) look like in the future (end of 2021). From this perspective, we are forced to deemphasize the near-term, focusing instead on the return to a more normal world. As we look toward 2022, the virus will be a fading memory, the economy robust, but decelerating, the yield curve steeper and volatility lower, and the rotation into Cyclicals largely behind us.
2021 Sector Leadership: Secular Themes and Financials
- TECH+ (Overweight): We believe the fundamental case for TECH+ remains compelling with faster sales growth, superior margins, robust FCF, and low leverage, and recommend a positive bias toward this group on an ongoing basis.
- Financials (Overweight): Consistent with a typical recovery, Banks should benefit from improving credit conditions, increasing transaction volumes, and a steepening yield curve. The group is adequately reserved, likely resulting in a greater return of capital. Sector valuations are extremely cheap and estimates conservative for the group as a whole.
- Cyclicals (Neutral): We are positively inclined toward economically-sensitive groups, and believe their momentum should persist over the near-term. However, the greatest sequential improvement in economic activity is well behind us and moderating. Despite a strong expected EPS bounce, their 3-year CAGR is underwhelming.
- Non-Cyclicals (Underweight, Health Care Overweight): Non-Cyclicals should lag in an improving economy as falling volatility supports higher P/Es for riskier assets, and rising rates makes their high dividend yields less appealing. The one exception is Health Care which should outperform given a more robust earnings trend.
Near-Term Risks Real but Likely to Fade
While optimistic, we see a number near-term risks: (1) investor optimism is extremely extended, (2) production and distribution challenges could hamper the vaccine’s rollout, (3) rising case counts could result in shutdowns, disrupting the holiday season, and (4) stimulus could remain politically unattainable. On a positive note, the successful vaccination of seniors and front-line workers could expedite the renormalization process well before herd immunity is achieved.