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The stock market’s biggest bulls defend their Street-high targets: Morning Brief

Sam Ro
·Managing Editor

Monday, September 14, 2020

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Goldman, JPMorgan see S&P 500 rallying to 3,600 by year end

Driven by a mega-cap tech selloff, the S&P 500 (^GSPC) fell nearly 8% from its Sept. 2 high of 3,588 to as low as 3,310 on Friday.

But Wall Street’s biggest bulls are unfazed. In a pair of research notes published on Friday, JPMorgan and Goldman Sachs strategists reiterated their expectations for the S&P 500 to roar to 3,600 by year end.

Read more: Bull vs. Bear market: How to invest

“Corporate outlook continues to improve on stronger than expected economic and earnings recovery, constructive guidance, as well as positive balance sheet liquidity trends,” JPMorgan’s Dubravko Lakos-Bujas said. “We have held and defended a non-consensus bullish view on equities since end of March, and we expect the market to reach new highs (S&P 500 at 3,600) by the end of this year.”

Lakos-Bujas estimates S&P 500 EPS to come in at $136 in 2020 and $170 in 2021, both above the Street’s consensus estimates, as profit margins amplify earnings thanks to cost cuts and lower interest expenses.

Similarly, Goldman Sachs’ David Kostin also sees the S&P EPS surging to $170 next year led by growth in the information technology and health care sectors. He noted that while analysts have been revising up their earnings estimates, those revisions have stalled in the past few weeks. However, he believes that those upward earnings revisions will resume if a vaccine for COVID-19 is announced. This would relieve some pressure on valuations, which are historically high.

Kostin, who raised his S&P target to 3,600 last month, further argued that stock market valuations aren’t as high when you consider them relative to the extremely low yields on Treasury securities.

And rates are likely to stay low for a little while with the Federal Reserve keeping monetary policy loose, recently giving itself even more room to stay loose with its new average inflation targeting strategy. In fact, investors recently surveyed by UBS say the loose monetary policy is among the biggest drivers of stock prices.

Both Kostin and Lakos-Bujas, however, warn that the outcome of the U.S. presidential election presents a pretty big risk.

“These estimates do not include potentially significant policy changes under a Democrat sweep scenario,” Lakos-Bujas said about his EPS forecast.

“In the near term, the biggest source of uncertainty is Election Day,” Kostin said. “A Democratic sweep would likely lead to tax reform, lowering EPS modestly, but also potentially fiscal spending and changes to trade policy that would boost US economic growth and at least partially offset the tax headwind.“

But to be clear, no one is saying to stay out of the markets because of election uncertainty. It’s just something that could introduce some short-term volatility for longer-term investors.

“Despite the sharp selloff in the past week, we remain optimistic about the path of the US equity market in coming months,” Kostin said.

By Sam Ro, managing editor. Follow him at @SamRo

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