Today, we’re updating our thoughts on the broader US equity market outlook. Three big things you need to know: (1) First, we are making some adjustments to our existing S&P 500 forecasts, lifting our 2021 EPS forecast and price target by ~4%, and lifting our 2022 EPS forecast by ~3%, while also introducing our S&P 500 price target for 2022, which calls for a 9% annual gain. (2) Second, we continue to see risk of a pullback in the S&P 500 before year end, but view it as a buying opportunity. (3) Third, one key risk that we are monitoring for the stock market – and our call – is the possibility that S&P 500 EPS growth will turn negative in early 2022.
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Now, let’s jump into the details.
(1) Let’s start with our first takeaway, the updates to our S&P 500 forecasts.
• For:
• For 2022, we are introducing a price target of 4,900 or a 9% gain on the year, while moving our EPS forecast up just under 3% from $216 to $222.
€¢ While we do not yet have a:
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ext year’s EPS, at year-end:
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• Our new:
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(2) Moving on to our second takeaway, while we’ve tweaked some of our numbers, we want to stress that our narrative on the market is largely unchanged - we continue to see risk of a pullback in the S&P 500 before year end, but are emphasizing that we view it as a buying opportunity if and when it happens.
• As our regular listeners are well aware, the late year pullback call is one that we’ve been making for the past several months due in part to elevated equity market sentiment and positioning. We see this in futures market positioning for asset managers,
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• As well as in global tactical asset allocation funds where US equity stakes hit all time highs over the summer.
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• Trends are similar for individual investors when we look at the composition of household balance sheets.
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• Something else that’s kept us on guard for a pullback is the tendency of the S&P 500 to decline modestly on a 6 month forward basis after an early cycle peak in the rate of change in S&P 500 EPS growth occurs, which 2Q21 will be in the current cycle.
• But we expect a pullback in the 5-10% range, shy of an actual growth scare which tends to see stocks fall in the mid to high teens.
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• We think some of the language that’s come out over the past week about a growth scare is a little too harsh for a few reasons.
o First, even with recent downgrades, consensus forecasts still expect the US economy to see growth rates well above trend in the year ahead – there’s plenty of room for some downward revisions without taking us to a bad place economically.
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o Second, the high frequency indicators that revealed the negative impact the Delta variant was having in late July and early August such as Opentable dining, TSA flying, and Langer Consumer Comfort have started to turn up again.
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o One exception is back to work, which remains under pressure according to Kastle data, but this may improve as Biden’s plan for expanding vaccinations takes effect, as an early September Morning Consult poll indicated that 65% would only consider returning to an office when all of their coworkers were vaccinated.
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o Third, COVID trends are on the mend, with signs of a peak in cases nationally and in all major regions.
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o On a related note, there are also some indications that back to school fears were improving even before Friday’s press reports that some health officials believe PFE’s vaccine could get approval for 5-11 year olds by the end of October.
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h will turn negative in early:
• Bottom up consensus estimates for S&P 500 EPS growth are tracking at 4-5% in 1H22.
• Investors have been worrying about margin impacts from supply chains and labor, and concerns about higher corporate taxes are back in the spotlight. There were even reports last week that Senate Democrats are looking at a buyback tax.
• All of these issues seem manageable in isolation, but collectively could be more of a drag on EPS than the market can tolerate.
•:
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the same as Cyclicals) in mid-:
That’s all for now. Thanks for listening. And please reach out to your RBC representative with any questions.
