This is one for the bulls.
Deutsche Bank’s chief global strategist Binky Chadha outlined in a note Wednesday how stocks, which have been going nowhere this year, can break out to surge 12% by the end of 2016.
He says the tight range stocks have traded in since last January doesn’t reflect stocks being overvalued. Instead, his team’s model suggests stocks are now 4% cheap.
But for the 12% rally to happen, the most important thing is that economic data continues to top Wall Street’s expectations without any “new shocks” to the financial system.
Absent new shocks, a full positive data surprise phase would see equities break well above the range, though we do not see this happening until after the buyback blackout period around earnings ends in the third week of April. With data surprises already pointing to the S&P 500 at 2100, the lead from the dollar’s moves over the last 3 months suggests positive surprises will continue.
On Thursday, the S&P 500 opened at 2,025.10, down by less than 1% year-to-date.
To take the index up to 2,300, Chadha says economic indicators of consumer sentiment and confidence need to catch up to the hard data. Confidence has been shaken because of the recent growth scare, but the “hard data” still point towards a recovery.
Regional manufacturing indicators, for example, have recently improved, and the slowdown in the dollar’s climb could ease its drag on the sector nationally.
Also, the dollar’s tamed rally would ease pressure on the Chinese renminbi, which is positive for Chinese economic growth. China has been a major scare factor for markets in recent months.
Chadha also believes that the earnings decline should bottom in Q1, as the dollar, once again, eases its drag on multinational companies.
But even if earnings declines continue, Chadha says markets would look right through to the economic data if they continue to top expectations.
A rebound in the services sector should also be positive for stocks. On Thursday, Markit’s preliminary purchasing manager’s index (PMI) for March showed that the sector improved after a dip into contractionary territory in February, although the pace of new orders was still weak.