JPMorgan chief U.S. equity strategist Tom Lee had the most bullish price target on Wall Street for the S&P 500 in 2013, predicting the index would end the year at 1825.
Lee has just released his year-ahead outlook, and he can now claim the most bullish S&P 500 forecast for 2014 as well: he predicts the index will finish next year at 2075, implying 17% upside from today’s levels.
The JPMorgan strategist says U.S. stocks are “in a classic bull market.” He expects part of the upside to come from better earnings next year (with earnings growth accelerating to 9% from 6%) as well as a further expansion in the price-to-earnings valuation multiple (to 15.7x from 14.5x).
In his outlook, Lee lays out six reasons why he remains constructive on equities next year:
- We believe this is a classic bull market and the 6th year is typically strong. Historically, bull markets lasting at least 4 years (since 1897) have only ended with a recession — that is, they typically do not end just because “everyone is too bullish”.
- We estimate EPS growth is set to accelerate in 2014 to 9%, from 6% in 2013.
- There is still a strong relative value argument to be made for equities, particularly when comparing the current equity P/E of approximately 15x vs. the HY implied P/E of 16.6x (the inverse of the yield-to-worst).
- Potential for a positive growth surprise from a pickup in investment spending.
- Consumers are likely at the end of a de-leveraging cycle.
- As an aside, history suggests decent follow-through after a 26% annual gain.
Lee provides some thematic investment ideas for 2014 as well, highlighted in the table below.
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