The portfolio strategist team of Inigo Fraser-Jenkins and Alla Harmsworth at AllianceBernstein are out with a new long-term call on S&P 500, and it's a headline-grabber — especially now amidst a renewed bout of volatility after the blowup of Bill Hwang's family office.
Over the next eight and a half years, the S&P 500 (^GSPC) could reach 8,000, says the duo. The S&P 500 currently trades a shade under 4,000, which was the pair's prior target price for the major index.
The call is rooted in two expectations: low inflation and the inherent desire by investors to own stocks relative to other assets.
"We argue that we are in a very different policy environment. For the first time in at least a decade there is a plausible narrative for why inflation may rise. In addition, there are also reasons why rates may not respond as quick to inflationary signals. This leaves us with the prospect of persistent low real yields which can justify market valuations," explain the two strategists in an extensive 16-page research note obtained by Yahoo Finance.
And with the prospect of low long-term inflation, equity investors will be hard pressed not to bite consistently at the apple. That's even if valuations on equities look rich on the surface.
Points out the team, "In absolute terms valuation appears to be an impediment to returns. The Shiller PE [multiple] at 36x is at the top end of the 120-year range. But valuation has failed to be a guide for equity returns for over a decade. An investor who followed valuation would have sold equities years ago. Policy has trumped valuation. Moreover, the lack of other appealing assets that offer positive real returns means flows into equity are likely to continue, 'TINA' [there is no alternative] is not enough to make a fundamental justification for returns, but it can beget significant flow."
They do acknowledge the market's present concerns on rising inflation and how that may influence interest rates and ultimately stock prices. An inflationary outbreak is a key risk to the 8,000 S&P 500 call, the pair note.
"The most important point is that for the first time in at least a decade there is a plausible case for inflation. If this became 'unanchored' this could undermine the outlook, but we would argue that a moderate level of inflation would be positive," says Fraser-Jenkins and Harmsworth.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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