Undeterred by the threat of inflation and the Federal Reserve’s looming bond tapering, the S&P 500 has hit new highs in recent weeks. However, analysts believe the index’s run hasn’t finished yet.
Data released on 11 August showed that US consumer prices slowed in July, easing inflation worries. Although consumer prices remain at their highest level in 13 years, the consumer price index increased 0.5% month-on-month in July, having risen by 0.9% in June. According to the US Department of Labor, the month-to-month inflation rate slowed by its biggest margin in 15 months.
There is said to be optimism among some Fed officials that the air has been taken out of the inflation rate, and that things will be calmer in the months ahead.
Jack Ablin, chief investment officer at Cresset Capital Management in Chicago, told Reuters that the recent data “fits the Fed’s narrative and they can pretty much stand pat on their current strategy”.
Although the Fed is still expected to taper within the next six to eight weeks, on the basis that pricing has stabilised, analysts believe that the S&P 500 is still some way off its peak.
S&P 500 to hit 4,700 in 2021, Goldman says
In the year-to-date, the index has risen 20.02% to 4,441.67 at the close on 20 August, not far from its 52-week high of 4,480.26. The S&P 500 has gained 29.45% over the past year, but just 0.68% in the last month.
Back in July, David Kostin, a strategist at Goldman Sachs, had concerns that the index might not go any higher. Although a deceleration in economic growth can support growth stocks, the possibility of rising rates and tax reforms generally means it’s hard to predict the outlook for growth versus value stocks in the near term, he argued in a note to clients seen by Barron’s. At the time, Goldman Sachs maintained its 4,300 end of year target for the S&P 500.
However, with the release of the latest data suggesting inflation could be slowing and pricing pressures might ease over the next several months, growth stocks could experience a tailwind. It would also alleviate concerns about growth stocks trading in record territory.
On 12 August, Goldman Sachs upgraded its 2021 target to 4,700, which implies an upside of 5.82% from its 20 August close. The firm’s 2022 target was also raised from 4,600 to 4,900.
S&P 500 earnings lift price targets
Kostin and his colleagues acknowledged that companies had been more profitable than expected. “The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets,” it wrote in a note reported by Markets Insider.
“Relative to consensus, we expect stronger revenue growth and more pre-tax profit margin expansion as firms successfully manage costs and as high-margin tech companies become a larger share of the index,” it added.
Oppenheimer analyst John Stoltzfus also recently raised his 2021 target from 4,300 to 4,700. Credit Suisse analyst Jonathan Golub maintained a 2021 target of 4,600 but recently raised his 2022 target to 5,000. This suggests the index could rise in excess of 12% from the latest close by the end of next year.
“Over the past five quarters, analysts have significantly underestimated earnings per share, a trend we expected to continue,” wrote Golub in a note to clients seen by MarketWatch.
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