Photo: dbking, Flickr
Citi’s Tobias Levkovich just unveiled his 2013 target for the S&P 500 and it’s bullish.He see the index hitting 1,615, which is a more than 12 per cent gain of current levels.
Of course, Levkovich recognises that the target “may seem overly optimistic” given all of the uncertainties that remain.
But he also sees plenty of reasons for stocks to go up.
Here are some of the key points:
Valuations are attractive:
“The proprietary Panic/Euphoria Model is no longer generating a highly probabilistic sentiment based “buy” signal, but various valuation metrics and earnings-based methodologies provide a positive backdrop for further index gains.
Fed projections are bullish:
“The Fed’s lending standards survey does not intimate that the domestic outlook is facing problems given the typical nine-month lead on business activity or 12- month lead on S&P 500 revenues.
Credit is cheap:
“Economic and earnings expansion is likely even as margin concerns persist. With a helpful credit basis, one should expect improvement in capital investment, industrial production and employment to sustain US GDP development which then underscores a modest EPS growth rate to $108 in 2013 (up from $103 in 2012), which puts Citi within the broad consensus top-down estimate range of $105-$110, albeit lower than bottom-up expectations of 10%+ growth.
Washington will work on the deficit:
“Double-digit market appreciation will then require a lowering of risk premiums which is likely to be a result of policy initiative to address fiscal imbalances, almost irrespective of who wins the White House later this year.
General American awesomeness:
“A plausible shift towards The Raging Bull thesis outlined last December remains intact. The Raging Bull argument highlighted growth drivers such as the energy sector’s expansion, US manufacturing competitiveness, the explosive penetration of IT mobility and a housing rebound, combined with some positive demographic shifts for baby boom echo savers and more fiscally responsible behaviour out of politicians.”
And finally, people are way too worried about worst-case scenarios:
“Risks abound but risk premiums reflect many uncertainties, barring new shocks. A chaotic unravelling of European sovereign debt woes, a Chinese hard landing, new Middle Eastern tension that disrupts oil supplies and American fiscal deadlock could all be seen as new shocks that would undermine this 2013 view.
“Yet, one does not build a framework on low probability based outcomes but rather a base case with clearly identifiable risk parameters. There is no shortage of worries, but equity risk premiums near 30-year highs seem to reflect a good deal of them.
Here’s a breakdown of how Levkovich gets to 1,615:
Photo: Citi Investment Research & Analysis
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