The bull case for stocks in 2021

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JPMorgan analyst Dubravko Lakos-Bujas is the most bullish of the bulls on stocks for 2021.

Every Wall Street strategist that has so far offered a 2021 outlook predicted that U.S. equities will end next year higher.

But Lakos-Bujas’ call is the most upbeat: His baseline assumption is that the S&P 500 (^GSPC) will rise to 4,400 by the end of 2021, and in a best-case scenario, jump even further to 4,600. These forecasts imply appreciation of 18.2% and 23.5%, respectively, from the S&P 500’s recent closing high of about 3,722 from December 17. On the low end, stocks could end 2021 at 4,200, according to Lakos-Bujas, which would still represent a respectable rise of 12.8%.

According to a Yahoo Finance analysis, the median strategist sees the S&P 500 climbing 10.1% to 4,100 in 2021.

A year ago, Lakos-Bujas saw the S&P 500 ending 2020 at 3,400, or right around the median of analyst estimates at the time.

A ‘market nirvana’ scenario for equities

Lakos-Bujas’ upbeat assessment on the path forward for equities is based on a number of assumptions, including that central banks will continue to tilt toward easy monetary policy, vaccine distribution will go smoothly and that lawmakers in Washington will face a divided government scenario following the Georgia Senate runoffs.

“Equities are facing one of the best backdrops for sustained gains next year. After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, U.S. election uncertainty, etc.), the outlook is clearing with the business cycle expanding and risks diminishing,” Lakos-Bujas said in a note. “We expect a ‘market nirvana’ scenario for equities with the melt-up continuing into 1H21, driven by earnings recovery and multiple expansion.”

Much of the S&P 500’s overall gains in 2021 will likely come in the first six months of the year, Lakos-Bujas added, coinciding with the rollout of another virus-relief package and return of business activity as stay-in-place restrictions start to ease amid a wider spread vaccine rollout.

“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.”

Two Herens cows lock horns during the qualification round of the annual "Battle of the Queens", a traditional Swiss cow-fighting competition, in Aproz, Switzerland May 7, 2017. REUTERS/Denis Balibouse
Two Herens cows lock horns during the qualification round of the annual “Battle of the Queens”, a traditional Swiss cow-fighting competition, in Aproz, Switzerland May 7, 2017. REUTERS/Denis Balibouse

“This could start to pressure the multiple expansion story, making any market upside increasingly dependent on future earnings growth potential,” he added. “As such, we expect investors to become increasingly more selective in 2H21.”

His strategy recommendation for next year is for investors to take a “barbell approach,” favoring stocks most likely to benefit from a broad-based economic reopening, as well as those on the other end of the spectrum that have already been growing strongly during COVID-19 and that are likely to have staying-power in a post-virus society.

Also helping stocks next year will be a surge in equity inflows following a long period of cash stockpiling in 2020 as many investors held onto dry powder in the face of ongoing uncertainty, Lakos-Bujas said. He argued that this will come from a combination of corporations that resume buyback programs, institutional investors and retail investors, who will likely be buoyed by another round of virus-relief stimulus.

“We expect ~$1 trillion of equity inflow/demand in 2021,” he wrote. “Equity positioning relative to a longer-term historical context is still below average with ample room for mechanical re-leveraging as volatility level subsides.”

“Decline in volatility creates a positive feedback loop, where systematic and discretionary hedge fund strategies increase allocation to equities,” he said. “This process may take most of 2021, as economic recovery as well as inflows in the risky strategies are likely to be gradual.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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