- Despite a near 5% correction from its record highs, the S&P 500 has not yet hit its peak in 2021, DataTrek said in a Wednesday note.
- “There’s simply too large a gap between S&P earnings expectations and what Q2 actually delivered to get too bearish here,” DataTrek said.
- These are the three reasons why the S&P 500 still has room to hit record highs by year-end.
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The heightened uncertainty has led many Wall Street strategists to lean more bearish into the current drawdown, with Morgan Stanley’s Mike Wilson calling for a near 20% sell-off to about 4,000 on the S&P 500 by year-end.
But others are unfazed by the potential insolvency of Evergrande and are reaffirming their bullishness, including DataTrek Research co-founder Nicholas Colas.
“There’s simply too large a gap between S&P earnings expectations and what Q2 actually delivered to get too bearish here,” Colas said in a Wednesday note, adding,”there should be something left in US large caps over the remainder of the year – enough to see a new high.”
These are the three reasons why the S&P 500 still has room to hit record highs by year-end, according to DataTrek.
1. “The Federal Reserve is still clearly in the stock market’s corner.”
“[The Fed] is tiptoeing its way into bond purchase tapering. A rate increase in 2022 carries only coin-toss odds in Fed Funds Futures markets. More than anything, the Fed sees its mission as returning the US economy and particularly its labor market to a pre-pandemic state as quickly as possible. It’s not worried about inflation because, with 10-year Treasuries at 1.33 percent, the market is not worried about inflation. Oh, and it is abundantly clear that Chair Powell would like to be renominated, so the odds of a policy misstep that tanks equity markets now through year end are very low indeed,” Colas said.
2. “The S&P 500 is the highest quality broad stock market index anywhere in the world.”
“Lump together Apple, Microsoft, Amazon, Google, Facebook, Tesla and NVIDIA and that’s over a quarter (26%) of the index. All industry leaders in industries with great long term growth prospects. MSCI EAFE’s top holdings include just 2 tech companies (ASML, SAP) with a combined 2.9% weight. MSCI Emerging Markets is still overweight Chinese tech, which is going nowhere fast. Bottom line: whether the US/global economy grows a lot or just a little in 2021, US large caps will remain a go-to destination for marginal capital,” Colas said.
3. “There’s still an ample cushion of safety in terms of US corporate earnings expectations.”
“Remember that the S&P 500 printed an actual Q2 earnings result of $53/share in Q2. Wall Street analysts don’t expect earnings to see that level again until Q2 2022 and have $49/share in their models for the upcoming Q3 earnings season. Would corporate America be in such a rush to hire (and it clearly is) if C-suites were expecting an 8 percent decline in sequential earnings? No, they certainly would not. Which, of course implies that Q3 will be a very strong quarter and that 2022 estimate we mentioned above is certainly beatable,” Colas said.
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