3800 to 4500: Bank’s Bullish Targets for Next Year

• Most investment banks are bullish on 2021
• I am yet to see any “lower targets” for next year 
• What’s an acceptable forward PE ratio in this environment?

For the first time in history, global markets achieved $100 Trillion in market cap.

Golf clap… and hat tip to central banks.

Without “free money” – we would likely be at “half” that level. 

$100 Trillion is also 115% of global GDP.

To me that’s not a big deal – as I see GDP as “revenue”. Therefore, think of this as 1.15x sales. 

Expressed that way – from mine it’s not troubling. 

However, if we see “2x sales”, then you might suggest things are looking a bit stretched. 

Now major investment banks are falling over themselves to provide investors with their 2021 forecasts for the S&P 500.  Here’s a sample:  

• Citi – 3,800
• Wells Fargo – 3,850
• Morgan Stanley – 3,900
• BMO – 4,200
• Goldman Sachs – 4,300
• JP Morgan 4,500

Today the market closed a little lower at 3,391

At the very low end (Citi) see a 3% upside; and at the higher end (JP Morgan) are forecast a monster rally of 22% upside. 

What’s interesting (to me) is no-one is yet to guide lower for next year. 

Almost everyone is leaning to the same side of the boat (me included!)

Where do you sit?

For me, I think we will see at least 10% upside in the market next year – which puts me around 4,000.

I like this level both technically and fundamentally. 

The Fundamental Case

I will get to the tape in a moment – but first some logic on the multiple investors will be willing to pay. 

Now for 2021 (and quite likely 2022) – we can expect short-term rates to remain negative in real terms – with a very accommodative Fed. 

And to that end – I am not ruling out additional QE to fund massive budget deficits (as I’ve talked about in the past).

For example, I believe November’s weak jobs report told us just how much the real economy is struggling. 

Don’t be too surprised to see bipartisan support for a $2 Trillion-plus stimulus deal coming down the pike in February (ideally before). And I think this is what the market is pricing in.

Aggressive monetary and fiscal policy will be the primary driving forces behind equities. 

Headwinds will be things like COVID infections and the speed of the reopening…  but free money (and the eventual vaccine) will probably outweigh these concerns. 

I think we should expect forward multiples to be in the realm of 23x earnings (notably higher than the 10 year average of 15.5x) 

Therefore, the question becomes what earnings will be for the S&P 500? 

And that’s a more difficult question to answer.

For example, Factset have estimated that S&P 500 earnings will be around $168.

Source: Factset

And according to Ed Yardeni Research – he has analyst consensus at $168.85 (versus his own forecast at $160 for 2021) 

Now if we assume say $168… a forward 23x multiple puts the market at 3,864

However take a look forward at analyst expectations for 2022 at $196.77 

A 23x multiple for 2022 puts the market at 4500. 

A more modest 20x multiple has 2022 at around 4,000

And the Tape? 

From a technical perspective – in the near-term (i.e., next few months) – I believe a level of 3,800 is more than likely. 

This is 61.8% to 76.4% outside the retracement we saw over August / September: 

S&P 500 – Dec 7 2020

As an aside, 3800 was also Goldman Sachs end of year target. 

That said, I feel there is a high probability of a near-term pullback (e.g. to the tune of at least 5%).

For example, we look extended – trading well above the 35-week EMA. As such, I think there will be a good opportunity to buy the (expected) dip.

Now if we zoom out to the monthly time frame (as we assess 2021) – we’re able to better gauge bullish targets of 4500. 

My preferred method to gauge profit targets is to construct a Fibonacci retracement against the last meaningful pullback. From there, I look towards the 61.8% to 76.4% zone outside this distribution. 

Now if I apply this to the retracement we experienced over March (“A-B”) – this zone is around 4250. 

However, it’s most unlikely this will be in a straight line. For example, as the market wrestles with things like the speed of business re-opening, COVID vaccination success and shifting Fed sentiment. 

What I’m looking for here is a pullback towards the 35-month EMA (e.g. around 3200) – which I think will act as a good long-term risk-reward entry point. 

For example, if we see the market fall back below Point “A” (i.e. the last major high in February) – then I believe there is a good chance we test this level. 

Echoing recent posts – a forward PE ratio of 20x to 23x is not uncommon in a zero (or negative) rate environment.

What’s more, with bond yields historically low – the “TINA” principle tells us that money is more likely to find its way into risk assets. 

That said, I think the “scar tissue” caused by draconian government decisions will be long-lasting – and perhaps far more visible in 2021. 

As I keep saying – tens of thousands of these business are not coming back. 

Several million will not be able to find work. 

For now, the market is mostly ignoring this… assuming widespread (rapid) vaccinations will act as some kind of economic panacea. 

I think it’s wishful thinking but hope I am wrong. 

In closing, I’m bullish on 2021 for equities but not because I think the economy is in great shape. 

Far from it. It’s in terrible shape. 

My lens is limited to what I see with things like monetary policy, liquidity, credit spreads, rates and the likelihood of further government deficit spending. 

Put another way, when I see the exit signs from the Fed (which won’t be next year) and/or credit spreads meaningful widen – you will see my bullish sentiment shift. 

Regards,
Adrian Tout