We see an S&P 500 Index fair value target range of 3,850–3,900 at year-end 2021 with potential for upside if there’s better-than-expected progress on vaccine distribution. A strong earnings rebound may enable stocks to grow into somewhat elevated valuations. Our S&P 500 target is based on a price-to earnings (PE) multiple of 20 and our preliminary 2022 earnings forecast of $190. We see the 10-year yield finishing 2021 in a range of 1.25–1.75%. Inflation is likely to rise temporarily but then normalize, and the Federal Reserve (Fed) is expected to keep rates low. At the same time, an improving economy and even normalizing inflation could put upward pressure on rates, limiting return potential for high-quality bonds.
KEY CHANGES FROM DECEMBER’S REPORT
- Upgraded financials and crude oil views to neutral
- Downgraded communication services view to neutral
- Our equities recommendation remains overweight. We continue to favor stocks over bonds based on our expectation for a strong economic and earnings recovery in 2021, supported by additional fiscal stimulus—with potentially more coming soon based on the outcome of the Georgia Senate races— continued progress in combating COVID-19, and the likely continuation of the low-rate environment.
- Key near-term risks include containing the latest wave of COVID-19 while awaiting vaccines and concerns about potential tax increases and tougher regulations under a Democratic-controlled Congress.
- We maintain a slight preference for growth stocks as 2021 begins, bolstered by strong earnings trends and favorable positioning for the pandemic.
- As the economic recovery progresses in 2021, we would expect cyclical value stocks to get a boost. We have taken one step closer to a balanced growth-value view with this month’s financials upgrade.
- We expect solid economic growth across Asia to support continued outperformance by stocks in emerging markets (EM). EM may garner additional support from potential easing of US-China trade tensions, although ongoing geopolitical and regulatory threats may lead to bouts of volatility.
- Our fixed income view remains underweight. While Fed policy and modest inflationary pressure for now may limit the risk of a large rate move, rising rates may still put some pressure on bond returns going out a full year.
- We favor a blend of high-quality intermediate bonds that is underweight US Treasuries with an emphasis on short-tointermediate maturities with sector weightings tilted toward mortgage-backed securities (MBS).
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Stock investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole and can remain undervalued by the market for long periods of time. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. Bonds are subject to market and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Corporate bonds are considered higher risk than government bonds. Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
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Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
All index data from FactSet.
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