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Stocks to hit record highs in 2021 powered by V-shaped earnings recovery: Jefferies

A split Congress may make way for an S&P high next year — spearheaded by a V-shaped earnings recovery.

“We expect the market to reach 3,750 by end [the] of 2021,” wrote Jeffries global equity strategist Sean Darby in a note to investors.

He highlights that “U.S. equities have tended to perform well and outperformed global equities during a U.S. gridlock when the Democrats have won the presidential election.”

Darby notes the odds of a “skinny stimulus bill” passed during a lame duck session are “less than 50/50.” Stimulus funds are unlikely to arrive until January, and “equity markets may still face a growth ‘vacuum’ in December” and early January.

“But further out the difficulty in passing any corporate tax hikes and a less abrasive international trade policy should be beneficial for US equity markets,” wrote Darby.

‘20% EPS growth in 2020-2021’

The manner in which the economy deteriorated in the second quarter of 2020 “produced a V shaped earnings profile,” with the low around mid-year, said Darby.

“Based on our U.S. economics team, GDP growth and healthy expansion in China and overseas, we would expect the S&P 500 earnings integer to grow to 170 in 2021, putting the market on a forward PE of 20.3 X,” wrote the strategist.

“This equates to roughly 20% EPS growth in 2020-21,” he added.

His team forecasts a price target high of 3750 for the broader market by the end of next year.

“This puts the 2021 PE multiple to be 22.1x,” wrote Darby.

“We have raised the weighting of technology as the fear over tax hikes diminishes,” he added.

On Thursday the Nasdaq Composite (^IXIC) was outperforming the broader indices for a second day in a row, while the the S&P 500 (^GSPC) and Dow Jones (^DJI) both increased roughly 2% by mid-session.

The Nasdaq surged 3.9% the session right after Election Day, making it the best post-election performance in history.

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Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre

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