Written by Norman Isaac Mwambazi

Stocks expected to keep climbing as strategists look to a brighter 2021

A handful of strategists have so far offered their outlooks about where they think the S&P 500 is heading next …

A handful 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 is a look at where strategists expect the S&P 500 will land by the end of 2021.

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 this month 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.

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.”

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.

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 favour 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.

Jefferies (Target: 3,750; EPS $170): ‘A game of two halves’

Corporate profits beginning to recover after hitting a nadir in the first half of 2020, setting the S&P 500 to rise in tandem with improvements in bottom-line results, according to Jefferies equity strategists led by Sean Darby.

The S&P 500’s year-to-date rise came even as profit at most corporations tumbled over last year, as investors looked beyond the pandemic’s near-term negative impact to an expected sharp improvement in 2021. Aggregate S&P 500 earnings per share slid more than 30% in the second quarter of 2020 for the worst decline since early 2009.

The anticipated earnings recovery in the second half of 2020 and then especially in 2021, when year-over-year comparisons will be especially easy, will help fuel the next leg higher in the S&P 500, according to Darby.

“The manner in which economic numbers deteriorated in Q2 has not only produced a V-shaped earnings profile but the low has occurred around mid-year,” Darby said in a note. “Hence the 2020 earnings integer has not been the entire driver for shares but also the 2021 value.”

“We have held onto a V-shape earnings profile for 2020 and expect the earnings integer to trend to 142 by year-end since April,” he added. “Based on our U.S. economics team GDP growth and health expansion in China and overseas, we would expect the S&P 500 earnings integer to grow to 170 in 2021 putting the market on a forward PE [price/earnings multiple] of 20.3x. This equates to roughly 20% EPS growth in 2020-21. We have raised the weighting of technology as the fear over tax hikes diminishes. We expect the market to reach 3,750 by end of 2021. This puts the 2021 PE multiple to be 22.1x.”