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A number of strategists have so far offered their outlooks about where they think the S&P 500 is heading next year – and each one is expecting it to go up.
The new year is anticipated to usher in the distribution of a COVID-19 vaccine and a new presidential administration with a split Congress, alongside an extension of this year’s improving economic activity and low interest rates. Many analysts have cited this medley of events as fuel for another rise in equities.
Here’s a look at where strategists expect the S&P 500 (^GSPC) will land by the end of 2021.
Oppenheimer (Target: 4,300; EPS: $175): Six key assumptions point toward another year of double-digit gains
The S&P 500 is likely to post another double-digit percentage gain in 2021 as the distribution of COVID-19 vaccines underpins a lasting economic recovery, according to Oppenheimer chief investment strategist John Stoltzfus.
His 2021 price target of 4,300 implies upside of about 18% from the S&P 500’s closing level on December 11. This outcome is based on six key assumptions: First, that the public will expediently accept and receive COVID-19 vaccines and second, that equity investors will discount the success of the vaccines in reversing the disruptions brought on by the pandemic, he said.
Stoltzfus thirdly assumes that at least one of the two Senate seats in the Georgia runoff election will go to a Republican lawmaker, “thereby retaining their control of the Senate and reducing (if not necessarily eliminating) the risk that the Biden administration will eradicate the corporate tax reform act of 2017,” he said.
Fourth, he maintains that the Federal Reserve will continue its low interest rate regime in tandem with accommodative monetary policy, and fifthly, that congressional lawmakers will step in with another round of fiscal stimulus by the first quarter of 2021 at the latest.
Finally, Stoltzfus assumes that investor appetite will continue to tilt toward “stocks that favor diversification and both growth and value segments of the market in a relatively low interest rate environment that favors equities, real assets and other asset classes over fixed income for intermediate and longer-term objectives.”
But of all these factors, the vaccine rollout is arguably the most important in determining the trajectory of the S&P 500 next year, Stoltzfus argued.
“The degree to which the vaccine just approved in the past few days (as well as others pending approval) is successfully distributed and accepted by the public to stem the virus is in our view the most important assumption listed above in achieving our target price,” he said. “Ultimately the stock market is broadly dependent on economic growth to drive revenues and earnings across the sectors.”
Price target as of December 14, 2020.
*JPMorgan (Target: 4,400; EPS: $178): ‘One of the best backdrops for sustained gains in years’
Investors are entering 2021 against a confluence of market-positive events, including improving prospects for widespread vaccinations and sustained economic reopening, gridlock in Washington and accommodative central bank policy, said JPMorgan strategists led by Dubravko Lakos-Bujas.
Given the COVID-19 crisis, vaccine distribution is likely the linchpin event. But even with widespread vaccine availability still months away, optimism over early vaccine efficacy data has already sparked a rally among stocks hardest-hit by the pandemic.
“The equity market is facing one of the best backdrops for sustained gains in years,” Lakos-Bujas said in a note. “After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, U.S. election uncertainty, etc.), the outlook is significantly clearing with the business cycle expanding and risks diminishing. We expect a ‘market nirvana’ scenario for equities with the melt-up continuing into 1H21, driven by earnings recovery and multiple expansion.”
Much of next year’s stock market rise is likely to come at the beginning of the year, as lingering uncertainties over vaccine distribution, the results of the Georgia senate race and additional monetary and fiscal stimulus start to dissipate, he added.
“We expect next year to be front-loaded in terms of performance,” he said. “While the broader backdrop should still remain constructive in the second half of next year, by then the market will have likely priced in close to a full recovery and investors may start to expect a gradual shift in central bank forward guidance away from the current exceptionally accommodative stance.”
The S&P 500 will likely reach 4,000 “by early next year” before rising to 4,400 by year-end, for a nearly 19% from closing prices on December 9.
Price target updated December 9, 2020. JPMorgan set a 2021 price target of about 4,500 on November 9, 2020.
LPL Financial (Target: 3,900; EPS: $165): ‘We could potentially see S&P 500 earnings growth of 25% in 2021’
Stocks likely still have room to rise next year even after this year’s record run-up from March’s virus-induced bottom, according to LPL Financial.
“On average, stocks have historically gained about 65% during the first two years of a new bull market after an average 41% gain during year one,” LPL Financial strategist Ryan Detrick said in a note. “Even with the S&P 500 roughly 60% above its March 23, 2020, lows, we see further potential upside in 2021.”
“Favorable prospects for a safe and effective vaccine in early 2021, in our view, introduce the possibility of exceeding these historical averages as stocks did in 2009–10 when the S&P 500 nearly doubled in two years,” he added.
Stocks will likely grow into their currently elevated valuations next year as earnings rebound, with a widespread economic reopening allowing corporate profits to return to growth.
“Despite lingering effects of COVID-19, in 2021 we expect the economic recovery to drive a big rebound in profits,” Detrick said. “We could potentially see S&P 500 earnings growth of 25% in 2021, boosted by cost efficiencies achieved during the pandemic.”
In terms of the economic recovery, Detrick believes economic activity will begin sustainably improving in mid-2021 after a vaccine gets distributed to the broader population, “fueling above-average GDP growth for the full year,” he said. He forecasts real GDP growth of between 4.0% and 4.5% in 2021.
His fair value target range for the S&P 500 of 3,850 to 3,900 implies 2.6% appreciation on the high end from closing prices on December 8.
Price target as of December 8, 2020
Deutsche Bank (Target: 3,950; EPS: $194): ‘A gradual correction of overvaluation’
Much of 2020’s run-up in the stock market came with multiples expansion, as prices escalated despite a drop in earnings, as companies dealt with fallout due to the coronavirus pandemic.
Next year, as the economy recovers and a vaccine allows for long-lasting re-openings, earnings growth will rebound and multiples will de-rate, according to Deutsche Bank strategist Binky Chadha.
“The pattern of the equity market recovery, bottoming halfway through recession and recouping most of its losses before it’s over, has been typical but the continued run-up means valuations are high,” he said in a note. “In our reading, elevated multiples reflect increased participation of retail investors which we see as sustaining, but we expect the multiple to begin to de-rate.”
By Chadha’s calculation, the S&P 500’s current price-earnings multiple reflects an expensive stock market: Including Deutsche Banks’s annualized fourth-quarter earnings forecast, the S&P 500’s price-earnings multiple is at 22x, or about 5 multiple points above what the firm considers fair value.
For 2021, a recovery in earnings — which essentially increases the denominator of the price-earnings ratio — should lower multiples. That said, an increase in companies’ payout ratios as dividends and buybacks return could at least partially offset this, he added.
“A gradual correction of overvaluation argues for the the current overvaluation of 5 multiple points to diminish but remain significant at 3.6 points, putting the end-2021 multiple at 20.5x,” Chadha said.
His S&P 500 price target of 3,950 implies about 8% appreciation from closing prices on December 1.
Price target as of December 3, 2020
UBS (Target: 4,100; EPS: $176): ‘The key driver of U.S. equities will be the pace of vaccinations’
The vaccine-related developments that drove stocks’ gains in November and early December have now been baked into market expectations, leaving vaccine distribution the next milestone for equity investors to consider in 2021, according to UBS analyst Keith Parker.
“The key driver of U.S. equities will be the pace of vaccinations, similar to how shifts in mobility drove equities through the spring and summer,” Parker said in a note. “As people get vaccinated, they are likely to ‘normalize’ spending on areas impacted by COVID shortly thereafter.”
“We see the rotation toward cyclical services spending and other COVID-hit areas as a key investment theme for 2021,” he added.
Parker suggested that investors favor small caps over large caps, value stocks over growth, and growth over defensives. The firm is Overweight the consumer discretionary, industrials and energy sectors given that consumption and production will likely rebound next year. It downgraded materials and financials to Neutral. It is also Underweight consumer staples, utilities and REITs and Neutral on information technology, but overweight communication services and health care “on still attractive growth relative to valuations.”
As for the broader market, “the 4,100 price target is what we had estimated in the positive vaccine outcome in our scenario work,” Parker said. “However, the basis of the change reflects much more resilient earnings this year, as well as better GDP growth, with an assumed multiple that is slightly lower than in the positive vaccine outcome.”
The firm also maintained an upside case for the S&P 500 of 4,400, which would emerge in the case of higher-than-baseline growth against a backdrop of still-low interest rates. However, in a downside case, the S&P 500 could fall to 3,300, which “would entail a weaker recovery and/or tighter financial conditions,” Parker said.
Price target as of December 2, 2020
*Jefferies (Target: 4,200; EPS $180): ‘The much-maligned value and cyclical growth sectors are slowly making a comeback’
Improving prospects for a vaccine, easy lending conditions and broader participation among cyclical and value stocks will help propel the stock market higher in 2021, according to Jefferies strategist Sean Darby.
Jefferies upgraded its outlook for the S&P 500 in early December after initially unveiling a price target of 3,750 in early November before news of Pfizer, Moderna and AstraZeneca’s vaccine efficacy data first emerged. Their new outlook sees the S&P 500 jumping to 4,200, representing appreciation of another 14.7% from the index’s record closing level from Dec. 1.
November’s historic stock market rally, led by cyclical and value stocks in the energy, financials and industrials sectors, reflected broadening equity strength beyond just big tech and software shares. That rotation is anticipated to continue into next year, helping push the broader market higher, Darby said.
“Notwithstanding the second and third Covid-19 waves permeating the world, there is a palpable feeling that the global economy is resynchronizing with the household, corporate and government balance sheets expanding simultaneously alongside aggressive monetary policy,” Darby wrote in a note. “The much-maligned value and cyclical growth sectors are slowly making a comeback as inflation pressures begin to return. This rotation has been supported by a steepening in the yield curve and with growthier stocks trading sideways.”
“Improved visibility towards a successful coronavirus vaccine, easier lending conditions, little evidence of deflation and a sentiment switch from growth to value will lift US bank shares through 2021,” he added. “Rising global capacity utilization rates, firmer producer prices, improving world trade volume, booming housing/autos and a weak dollar are the perfect environment for the S&P 500 Industrials. The S&P 500 materials sector is blowing off in response to a weak dollar, higher commodity prices, an upswing in global manufacturing and a restocking cycle.”
*Price target upgraded on December 2, 2020. Jefferies set a 2021 price target of 3,750 on November 5, 2020.
Bank of America (Target: 3,800; EPS $165): ‘A lot of optimism is priced in already’
Stocks have already priced in much of the expected recovery in the economy and corporate profitability, leaving just slightly more upside heading into next year, according to Bank of America equity strategist Savita Subramanian.
Subramanian’s S&P 500 price target of 3,800 implies 4.5% appreciation from closing prices on November 24, for one of the most muted forecasts among major Wall Street firms so far.
Even as investors ride a wave of vaccine-related optimism, potential negative catalysts abound, she noted.
“The recovery is intact and the world likely re-opens in the 2H, but a lot of optimism is priced in already on vaccine/recovery,” Subramanian said in a note. “Vaccine execution risk, delayed fiscal stimulus and longer lockdowns are risks. A simple move in the equity risk premium back to the prior decade average of ~500-550bps (vs. current 437bps), would drop the S&P 500 down to 3000-3050.”
“But a few themes support stocks: the S&P 500 dividend yield is 3x the 10-year yield, and S&P 500 dividends are set to increase in 2021,” she added. “And unlike bond yields, earnings are nominal and participate in inflationary upside – where inflation risks may be running higher, given rampant money-printing and a potential post-vaccine spike in demand.”
By style and sector, Subramanian said she picks value stocks over growth, cyclicals over defensives and small caps over large caps, given each of these groups’ likelihoods to be disproportionately boosted by a post-virus economic recovery.
Price target as of November 24, 2020.
BMO Capital Markets (Target: 4,200; EPS: $175): ‘Expect another year of double-digit gains’
Heading into 2021, stocks are poised to keep reaping the benefits of the massive infusion of monetary support from the Federal Reserve, along with an anticipated additional round of fiscal stimulus. This constructive policy environment is likely to help push equities higher even as virus concerns linger for at least the first several months of the new year, according to BMO Capital Markets strategist Brian Belski.
“Even with recent positive vaccine and treatment developments, the global pandemic and its unprecedented impact is unlikely to fade in coming months. As such, the massive fiscal and monetary response in the U.S. and around the world (also unprecedented) will likely remain in place to combat its negative economic impact for the foreseeable future,” Belski said in a note. “Such environments have historically supported continued stock market gains and we see no reason why 2021 will be any different.”
Corporate earnings growth will recover sharply from pandemic-era declines, Belski added, especially since this year’s drop in company profits had largely been triggered by lockdowns, rather than underlying issues in the companies themselves.
“Aside from the global financial crisis, 2020 represented the swiftest quarter-over-quarter earnings collapse for the S&P 500 where index EPS plummeted nearly 50% during 1Q,” Belski said. “Thus, we anticipate that 2021 has the potential to be one of the best years ever in terms of earnings growth, something we believe will also help to push stock prices higher.”
His 2021 S&P 500 price target of 4,200 implies additional upside of 17.3% from closing prices on November 19, and 15% appreciation from his 3,650 price target for the S&P 500 for year-end 2020.
To arrive at this level, Belski assumes one or more COVID-19 vaccines will be publicly available during the first half of the year, at least one more round of fiscal stimulus from Congress will emerge in the $1 trillion range, trade uncertainty will moderate, and the yield curve will begin to steepen.
“We remain optimistic and expect another year of double-digit gains as the economy and society slowly transition back to normal,” he said.
Price target as of November 19, 2020
Credit Suisse (Target: 4,050; EPS: $168): What the future will look like in the future
Credit Suisse analyst Jonathan Golub introduced his 2021 price target for the S&P 500 (^GSPC) of 4,050, implying 12.2% upside from closing levels on November 17. Underpinning this upbeat call is his assumption that two years from now, the post-virus economic recovery will have already hit a peak.
“Our 2021 forecasts are designed to answer a simple question: what will the future (2022) look like in the future (end of 2021),” Golub said in a new note Wednesday. “From this perspective, we are forced to de-emphasize the near-term, focusing instead on the return to a more normal world.”
“As we look toward 2022, the virus will be a fading memory, the economy robust, but decelerating, the yield curve steeper and volatility lower, and the rotation into cyclicals largely behind us,” he added.
Based on Golub’s analysis, economic activity as measured by GDP growth will renormalize at levels slightly above trend, or with quarterly annualized growth rates just over 3%, starting in the second half of 2021.
And the labor market — which as of October was still 10 million payrolls short of pre-pandemic levels — will likely reach “full employment” by the second half of 2022, Golub added.
Since the stock market discounts future events, each of these prospects for further improvement down the line should translate into a higher S&P 500 as investors price in these events.
Analysts have already begun to account for an anticipated improvement in corporate profits, as S&P 500 earnings per share (EPS) have on aggregate sharply topped consensus expectations so far for each of second and third quarter results this year.
“We expect 2020 estimates to rise, 2021 to remain stable and 2022 to moderate,” Golub said.
His 2021 S&P 500 price target of 4,050 is based on earnings per share of $168 next year, for an improvement of 20% over the expected aggregate EPS this year. He expects EPS will then rise to $190 in 2022.
Price target as of November 18, 2020
Morgan Stanley (Target: 3,900; EPS: $193): ‘2021 will be much more about stock picking’
Next year is set to be a stock-picker’s market, according to strategists from Morgan Stanley.
“After a year of big swings in valuations, 2021 will be about who can deliver on earnings,” Morgan Stanley strategists led by Michael Wilson wrote in a note.
“2020 was all about beta and understanding how equity markets trade in and around a recession that handed us the fattest pitch we’ve seen in a decade,” he added. “2021 will be much more about stock picking (alpha) and should favor those companies that can deliver earnings growth that isn’t already expected or priced.”
Wilson said he prefers companies with earnings growth most tied to re-openings and an economic recovery.
“We continue to lean cyclically in our recommendations,” he said, noting that one of his “highest conviction views” is for small-cap companies over large-cap players, with the former tending to outperform during recoveries.
“Our sector [overweights] remain Financials where we see positive upside skew on rising rates and better credit; Materials and Industrials on demand rebound, earnings leverage and inflation protection; and Health Care given its GARP [growth-at-a-reasonable-price] characteristics and re-rating potential with fading political overhangs,” he added.
He also upgraded Information Technology sector to Equal weight from Underweight, left Consumer Discretionary sector as Equal weight and remained Underweight on the defensive Consumer Staples and Utilities sectors.
Price target as of November 16, 2020
Goldman Sachs (Target: 4,300; EPS $175): A vaccine is the ‘more important development for the economy’ than the new administration
As with strategists at JPMorgan, those at Goldman Sachs agreed that a vaccine will be the most critical catalyst for the stock market in 2021.
“A vaccine is a more important development for the economy and markets than the prospective policies of a Biden presidency,” Goldman Sachs strategists led by David Kostin said in a note.
The economic reopening coming alongside a vaccine, in tandem with a status quo policy environment cemented with a divided government, will help push the S&P 500 to 4,300 by year-end 2021 and then to 4,600 by the end of 2022, Kostin said. The price target implies nearly 20% appreciation from closing prices on November 13.
The additional upside is contingent on a number of baseline assumptions, however, including at least one vaccine being approved by the FDA and administered to a “large portion of the U.S. population,” Kostin added. He also assumes that the Senate will remain under Republican control following the Georgia run-off elections in January, the economy will continue on a path toward a “V-shaped” recovery, corporate profits will rebound, Fed funds rate will hold near-zero and the yield curve will steepen while the 10-year Treasury yield climbs “only modestly.”
To maximize potential returns while minimizing risks over the next year, the strategists advised investors “use a barbell,” or focus on the extremes of stocks most exposed to, and least exposed to, risks from the pandemic.
Specifically, they suggested “tactical positions in deep Value stocks that benefit from the vaccine and economic normalization and stocks with long-term secular growth prospects that have high growth investment ratios.”
“We recommend overweights in Information Technology, Health Care, Industrials and Materials,” they said.
Price target as of November 11, 2020
JPMorgan (Target: 4,500; EPS $178): ‘One of the best backdrops for sustained gains in years’
Investors are entering 2021 against a confluence of market-positive events, including improving prospects for a vaccine and sustained economic reopening, gridlock in Washington and accommodative central bank policy, noted JPMorgan strategists led by Dubravko Lakos-Bujas.
Given the COVID-19 crisis, vaccine distribution is likely the linchpin event. But even with widespread vaccine availability still months away, optimism over early vaccine efficacy data has already sparked a rally among stocks hardest-hit by the pandemic. This rotation is set to continue, bringing the S&P 500 higher as participation broadens beyond just Big Tech and “stay-at-home” stocks, according to JPMorgan strategists led by Lakos-Bujas.
“The equity market is facing one of the best backdrops for sustained gains in years,” Lakos-Bujas said in a note. “After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, U.S. election uncertainty, etc.), the outlook is significantly clearing up, especially with news of a highly effective COVID-19 vaccine.”
Both Pfizer (PFE) and Moderna (MRNA) announced in November that their late-stage trials showed their vaccine candidates were more than 90% effective in preventing COVID-19 in participants, for an efficacy rate far and above what many public health experts had been expecting.
And in Washington, a gridlock scenario with Democratic President-elect Joe Biden, a Democratically controlled House of Representatives and what is likely to remain a Republican-controlled Senate represents the “market nirvana” scenario, according to Lakos-Bujas.
“With an even balance of power in the legislature, major tax increases and regulatory changes will be difficult to pass, while at least some easing of the global trade war should be expected,” he said. “Global central bank policy remains very supportive (rates to remain at zero with ongoing [quantitative easing]). The prospect for another round of fiscal stimulus has improved as well, though scope and size should be narrower.”
“Given the above, we see the S&P 500 surpassing our price target of 3,600 before year-end and reaching 4,000 by early next year, with a good potential for the market to move even higher (~4,500) by the end of next year.”
Price target as of November 9, 2020
This article was originally published on November 17, 2020.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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