S&P 500 at 1,715 by year’s end, but we need more cowbell: J.P. Morgan May 17
J.P. Morgan strategists have lifted their year-end target on the S&P 500 SPX +0.61% to 1,715 from 1,580 based on a better bull market than they expected.
In a note dated May 16, portfolio strategists Thomas Lee and Katherine Khor rationalize the 65-point upgrade by saying this bull market is nearing history — “the average gain in the fifth year of a bull market is 19% (implies 1,719).” They admit that the timing of the call is “not ideal as equity prices hover near highs,” but also don’t think investors should be cutting back.
And here’s where they think that cowbell could be clanging a little louder.
“To be incrementally constructive on equities, investors ultimately have to expect stronger economic growth — at least compared to consensus expectations. In our recent conversations with investors, consensus seems to have difficulty imagining the U.S. economy accelerating given the headwinds out of Europe, China, high unemployment in the U.S. and the negative signals from the downturn in commodities. There are clues growth is likely strengthening. Consider the outperformance of semiconductors and transports year-to-date. Or the steepening of the 10-year vs. the 30-year yield curve. In our view, these historically have been reliable market indicators of improving growth."
While consumer wealth has recovered back to levels of 2006, consumers aren’t spending. They estimate that wealth metric will rise $9 trillion between the start of 2012 and the end of this year, the biggest two-year increase in more than a decade.
Consumer purchases of durables stands at 8% of GDP, a level matching the troughs seen in 1982, when we had double-digit inflation and double-digit unemployment. Clearly consumers today are cautious, but we believe that if markets sustain these gains, spending will rise next year, bolstering the growth improvement outlook.”
So what could go wrong? A market that loses confidence in the Fed. That could manifest itself in a selloff of yield assets due to fears the Fed will taper its asset program, or if markets begin to “smell inflation,” causing rates to rise even if the Fed keeps on buying bonds. In either case, this will hurt the “bond trade” in equities (i.e. defensives) and create a headwind for equity prices, say Lee and Khor.
But for investors who are game, J.P. Morgan throws in some sector recommendations, saying risk reward is “particularly attractive” in technology, healthcare and financials. Technology represents 27 points of that upgrade to their year-end S&P 500 target, and they say the sector trades at an “unjustified” 13 times discount to the S&P 500. And that’s not just Apple’s AAPL +0.16% fault, they say, as many of the large-cap technology stocks are trading at single-digit price-earnings.