Citi Unveils New Bullish Forecasts For The S&P And The Dow

We still have three and a half months before the year ends.

But Wall Street’s top stock market strategists are already publishing their new 12-month and 2014 year-end forecasts for the S&P 500 and Dow Jones Industrial Average.

Today, we heard from Citi’s Tobias Levkovich in his new 10-page Monday Morning Musings note. Here’s his call:

Establishing year-end S&P 500 targets are always challenging but various indicators argue for continued gains in 2014. The analysis used to calibrate next year’s index view involves nine different methods, including a normalized earnings yield gap approach, the P/E Bulls-Eye, currency measures, and consumer confidence, which supports a 1,900 year-end result for the S&P 500 – 4% above the previously released June 2014 expectation of 1,825. Moreover, it represents roughly 12%-13% further upside from current levels. In conjunction with the S&P 500, a DJIA forecast for year-end 2014 has been set at 17,100.

Based on data since 1940, a P/E in the 14x to 16x range has been followed by an average 12.6% return over the next 12 months.

Levkovich now sees the S&P 500 ending 2013 at 1,650, up from his long-time target of 1,615. But he also cautions against getting too excited. Indeed, 1,650 is below Friday’s close of 1,687. From his note:

We stress that some near-term caution is appropriate given the market’s run and our revised 2013 target is still below current S&P 500 levels. Intra-stock correlation is not sending a tactical buy signal and the economic surprise index also argues for some wariness. The percentage of NYSE stocks at or below 52-week highs often needs to dip to around 50% to signal a new bull run while a basket the most shorted stocks in the Russell 1000 has run up to almost two standard deviations of outperformance of late suggesting an overbought condition. Hence, we would be reluctant to take part in the current bull chase, but the Raging Bull Thesis remains in place as we look towards the next year.

U.S. stock futures are currently pointing to strong gains for the day.

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