Just a few weeks ago, Wall Street’s equity strategists rolled out their 2018 forecasts for the stock market. But now that tax reform is basically a done deal, some strategists are rewriting their outlooks.
Credit Suisse’s Jonathan Golub had called for the S&P 500 (^GSPC) to climb to 2,875 in 2018 on $139 in earnings per share (EPS). In a note to clients on Thursday, Golub raised his target to 3,000 on EPS of $155.
“[C]orporate results have surprised, GDP expectations have improved, and tax rates have fallen,” he wrote. “While the new effective tax rate remains uncertain, an assumed rate of 21% adds $12, or 8%, to our 2018 EPS estimate.”
On Wednesday, Citi’s Tobias Levkovich raised his price target to 2,800 from 2,675 while increasing his EPS forecast to $146 from $141. Though, he cautions against getting too excited about how tax cuts will hit the bottom line.
“Each 1% of tax rate decline theoretically adds nearly $2 of EPS but several company management teams are suggesting that a portion of the tax savings will be used for competitive strategies, which may include price cuts and/or more marketing expenditures,” he said. “Thus, it may be presumptuous to build the full benefit into 2018’s projections and Street hopes of a very large boost may be disappointed.”
Nevertheless, Levkovich acknowledges that stocks could go a lot higher.
“The possibility of a blow-off rally does exist but we doubt that a repeat of 1999’s exuberance is probable,” he said. “The excitement around cloud, automation, robotics, virtualization, cybersecurity and mobility has been a major part of the near 40% rally in the Information Technology sector this year and hence it seems unlikely that another big boost is coming in 2018. The underlying fundamentals are very well known and thus captured in current valuations and forecasts, in our opinion.”
Elsewhere, Morgan Stanley’s Michael Wilson maintains his 2,750 target on the S&P. Though on Wednesday, he reiterated his call for “a market top the day a tax bill becomes law.” However, he thinks any weakness in the markets should prove temporary.
“First, breadth is still too strong and we have yet to see any major divergences in that regard. Second, the tax cut bill didn’t just happen earlier than we thought, but the cuts are bigger too which can get us higher than current levels, particularly if the euphoria stage persists,” Wilson said. “As a result, we are open to the idea that if we finally get a pause to reset sentiment and positioning in January, that could set us up for a move toward our bull case of 3,000 in 1H 2018.”
Here’s a summary of Wall Street’s 2018 targets:
Credit Suisse’s Jonathan Golub: 2018 target 3,000; EPS $155
JP Morgan’s Dubravko Lakos-Bujas: 2018 target 3,000; EPS $143
Oppenheimer’s John Stoltzfus: 2018 target 3,000; EPS $146
BMO Capital’s Brian Belski: 2018 target 2,950; EPS $145
UBS’s Keith Parker: 2018 target 2,900; EPS $141
Jefferies’ Sean Darby: 2018 target 2,855; EPS $148.10
Deutsche Bank’s Binky Chadha: 2018 target 2,850; EPS $146
Goldman Sachs’ David Kostin: 2018 target 2,850; EPS $150
Bank of America Merrill Lynch’s Savita Subramanian: 2018 target 2,800; EPS $139
Citi’s Tobias Levkovich: 2018 target 2,800; EPS $146
For a little more context, click here for what Wall Street had predicted for 2017.
Sam Ro is managing editor at Yahoo Finance.
Follow him on Twitter: @bySamRo