Market Strategy 12/14/2020

Key Takeaways

• We initiate our target price of $4300 for the S&P 500 by year-end 2021 or just under an 18% rise above its closing level on Friday December 11.
• Our price target is based on a number of assumptions including a successful launch and acceptance of vaccines of efficacy to stem the Covid-19 pandemic.
• We expect monetary policy to remain supportive of the US economy and another tranche of fiscal policy stimulus if not before the end of 2020 then by the end of the first quarter of 2021.
• We continue to overweight US equities with meaningful exposure to international developed and emerging markets. We favor as well overweighting cyclical sectors over defensives.   

We initiate a target price of $4300 for the S&P 500 by year-end 2021 or just under an 18% rise above the 3,663.46 the level that the benchmark closed at last Friday, December 11. We base our target on assumptions that include:

• Approval by the FDA followed by the successful rollout and acceptance by the public of vaccine(s) capable of stemming the spread of the Covid-19 pandemic;
• The equity market’s capacity to discount the success of said vaccine(s) in stemming the spread of Covid-19 as well as material progress in reversing the societal and economic disruptions wrought by the pandemic since Q1 2020;
• Prospects that the Republican party will win at least one of the two US Senate seats in the runoff election in Georgia scheduled for January 5, thereby retaining their control of the Senate and reducing (if not necessarily eliminating) the risk that the Biden administration will eradicate the corporate tax reform act of 2017. Such a move could substantially raise taxes on many US corporations that have benefited from lower tax rates, which have in turn improved US corporate competitiveness globally, increased profitability, encouraged innovation, strengthened balance sheets and contributed to job growth (prior to the economic shuttering necessitated by the pandemic);
• A low interest rate regime supported by accommodative monetary policy from the Federal Reserve as well as secular trends embedded in technology (robotics, algorithms) and globalization that are counter-inflationary while contributing to much needed reflation to boost economic activity back to pre-pandemic levels;
• The likelihood of another round of fiscal stimulus before year-end 2020 or at the latest in the first quarter of 2021;
• A continuation of the recent broadening of investor appetite (among professional and private investors) for stocks that favor diversification and both growth and value segments of the market in a relatively low interest rate environment that favors equities, real assets and other asset classes over fixed income for intermediate and longer-term investment objectives;

The degree to which the vaccine just approved in the past few days (as well as others pending approval) is successfully distributed and accepted by the public to stem the virus is in our view the most important assumption listed above in achieving our target price. However, our target price is also highly dependent on realizing to large extent the other potential outcomes listed. Ultimately the stock market is broadly dependent on economic growth to drive revenues and earnings across the sectors.

Our 2020 target for the S&P 500 of 3,500 which we initiated on December 17 of 2019 was based on expectations of improved economic performance and resilience in corporate revenues and earnings. Last December our earnings projection for the S&P 500 was $175. Subsequently we suspended our price target and earnings projection on the morning of March 23 of this year as the risks from Covid-19 to the US and world economy and markets overwhelmed near-term growth prospects.

As risk from the pandemic elevated earlier this year corporate guidance was virtually eliminated and consensus analytics in projecting earnings in our view became akin to “flying without instruments”— so long as a device or methodology to stem the spread of the virus was not forthcoming.

A fast monetary policy response by the Federal Reserve and the creation of what we termed “a bridge over troubled waters” in the form of fiscal stimulus rescue packages for individuals and businesses by the Trump Administration and Congress early on prompted us to remain bullish on equities.

While we had suspended our target price and earnings projection we persisted with our recommendation from the start of 2020 to remain overweight US equities while maintaining meaningful exposure to developed and emerging market international equities. We recommended favoring exposure to cyclicals over defensive sectors and rated information technology, consumer discretionary, industrials and financials as outperform-rated to provide essentially a “split ticket’ or “barbell” approach to diversification. We rated just two sectors “underperform” (utilities and energy) at the time rating the balance of the sectors as “market weights”.

As the closure of 2020 draws near we maintain this view that favors equities globally and over weighting the US markets and cyclical over defensive sectors. We carry forward last year’s earnings projection of $175 for the S&P 500 for calendar year 2021 on expectations that the US will progress in its recovery from the pandemic emergency moving 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.