Photo: Bloomberg via YouTube
JP Morgan’s Tom Lee has a reputation for being a Wall Street perma-bull. Even after making a huge downward revision, he still sees the S&P 500 ending this year 1,350.So, it’s no surprise that his 2012 target is also bullish. Lee sees the S&P 500 ending next year at 1,430.
We believe the S&P 500 will reach 1430 by the end of 2012. This based on a target multiple of 13.0x estimated 2013 EPS of $110. From any historical lens, this P/E multiple appears conservative, representing an earnings yield of 7.7% (compared to JULI HG yield of 4.4%). We see Cyclicals and Financials outperforming, with Financials as our top pick for 2012.
Lee’s assumptions include S&P 500 EPS rising to $105 in 2012 and $110 in 2013.
1. J.P.Morgan Fixed Income Strategists are constructive for 2012 on High Grade, High Yield, MBS, ABS, and CMBS. Given equities are the junior piece of the capital structure, this is positive for equities.
2. Consensus is cautious about 2012.
3. The J.P.Morgan base case is for the Euro crisis to abate by 2H12 with Europe potentially exiting recession by mid-year. Historically, equities have bottomed 6- 9 months ahead of a return to growth.
4. EBIT margins should expand 100-150bps in 2012, bolstering net profit margins by 60-90bps to 10%, setting a new high for profit margins and driving 2012E/2013E EPS of $105/$110.
5. Corporates are likely to ramp up total cash return by as much as $250 bn in 2012. For the past five years, corporates have represented 97% of the incremental inflows into equities.
6. U.S. housing should see a further advance in its recovery in 2012, driven by expanding household formation rates. Vacancies are at five-year lows and other factors are also supportive.
7. The 2012 U.S. election cycle should be positive for equities. Stocks have historically done well when an incumbent has had low approval ratings going into an election year (positive returns in seven of eight years).
8. China entering selective easing cycle sets the stage for a Cyclical upturn in EPS.
Here are Lee’s scenarios.
Photo: JP Morgan
Lee is definitely more bullish than most of the strategists we’ve heard from. However, he’s not quite as bullish as Deutsche Bank’s Binky Chadha, who see the S&P 500 closing 2012 at 1,500.
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