Photo: flickr / Steven Wong
Ironically, after an exciting weekend of speculating how bad the fallout from the Cyprus bailout deal could be, we got updates from four big banks on their year-end S&P 500 targets this morning.Everyone is raising them.
What’s the reason for the wave of optimism?
For the most part, strategists cite an improving economic outlook, better earnings fundamentals, and yes, more aggressive central bank easing around the world.
Goldman Sachs is upping its target to 1625 from 1575.
Goldman’s Chief U.S. Equity Strategist, David Kostin, writes:
We lift our year-end 2013 index target to 1625 (from 1575) reflecting a modest 4% rise from the current level. US equities currently trade near fair value based on various metrics as well as our macroeconomic regression model, our dividend discount model (DDM), and the relationship between return on equity (ROE) and price/book value. S&P 500 trades at 13.9x bottom-up consensus forward EPS, near the average of the past decade, but well above the 12.9x average forward P/E since 1976. Fed model suggests 14% upside by year-end 2013 while the cyclically-adjusted P/E ratio points to 7% downside.
We recommend cyclical exposure rather than defensive tilt. Financials, along with Industrials and Materials, should outperform. The thesis behind our bullish view on Financials involves accelerating economic growth, rising 10-year interest rates, improving ROE, and rising dividends and buybacks. We lower Information Technology to Neutral.
Deutsche Bank is raising its target to 1625 as well (from 1600).
Deutsche’s Chief U.S. Equity Strategist, David Bianco, writes:
We expect the S&P 500 to make secular bull market advances this spring and boldly go where it has never gone before. DB economists raised 2013E US GDP to 2.3% from 1.7% on a string of better than expected macro reports that suggest the economy is overcoming its fiscal drags. Stronger US growth and particularly the upturn in business spending underlies the boost to our 2013E S&P EPS to $109 from $108.
We consider the risks of a US credit rating downgrade or jump in long-term interest rates greatly diminished given sequestration’s commencement. Benign inflation should keep the Fed committed to its current policies and Congress is almost certain to pass a budget that averts a government shutdown and yet continues to proceed with significant 2013 spending cuts.
Credit Suisse is hiking its target to 1640 from 1550.
Credit Suisse’s top equity strategist, Andrew Garthwaite, writes:
Valuation: Our model suggests a warranted equity risk premium should now be 4.7% (down from 5.4%) – against an actual equity risk premium of 6%;
The tail risks have diminished further: The private sector in the US looks strong enough to withstand fiscal tightening of around 2.5% of GDP this year. The possibility of OMT activation has allowed Spanish 3-year note yields to fall to 2.5%. Japanese policymakers finally look determined to end deflation (via the BoJ activism and fiscal policy). Commodity prices (oil, food, copper) remain well-behaved, unlike in previous years. Global GDP growth (YoY) is set to pick up for the first time in 11 quarters;
More aggressive central banks: Since December, central bank balance sheets have declined by the largest amount since 2009. This is set to reverse. We think the BoJ and BoE will become more aggressive (the ECB’s balance sheet has contracted by 14% from peak). Central bank balance sheet expansion is likely to lead to rising inflation expectations and rising excess liquidity; both typically lead to a re-rating of equities. The ideal time for equities is rising inflation expectations without the actuality of rising inflation – an environment we believe persists until 2015.
Morgan Stanley is upping its target to 1600 from 1434.
Morgan Stanley’s Chief U.S. Equity Strategist, Adam Parker, writes:
Based on moderately improved fundamentals, we are revising our 2013 S&P 500 EPS estimate up to $103.20 from $98.71 (Exhibit 1). We remain well below the bottom-up consensus, which expects $112 of EPS in 2013. Our 2014 estimate is unchanged at $110.21, below the consensus estimate of $125. The reason for our increase to 2013 is that the starting point of 2012 EPS came in higher than we forecast.
We set our 2012 earnings forecast of $100 when the bottom-up estimates were $114 over 18 months ago. While our forecast bore fruit, the Q4 2012 numbers, in particular, came in modestly above our expectations, fuelled in part by a weakening dollar. Consistent with the Morgan Stanley Economics Team, we see improving fundamentals in the second half of the year and into next year. The bad news is that the consensus bottom-up forecasts most likely need to be materially lowered, particularly for 2014.
Justified? We’ll see.
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