Tuesday, December 8, 2020

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Wall Street might not be bullish enough on 2021

In the Morning Brief and elsewhere on Yahoo Finance, we’ve extensively covered year-ahead forecasts published by strategists on Wall Street.

Last week, Keith Parker, head of U.S. equity strategy at UBS, published his year-ahead forecast for the S&P 500 (^GSPC) and called for the benchmark index to rise to 4,100 by the end of next year. From Monday’s close, this implies a gain of around 11%.

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“We target 4,100 for the S&P 500 next year, based on 2022 EPS of $205 and a fair forward P/E of 20x,” Parker writes. “We see gains front-loaded driven by vaccinations, with the prospect of 4,000 by Q2.”

As is the case with all Wall Street forecasts, Parker makes clear his projection is the most likely outcome in a variety of possible scenarios, not a definitive peg on what will happen to stocks in 2021. But in including the usual caveats to this forecast, Parker makes a notable call in outlining where the balance of risks lie. Which for next year, is up.

“We see the upside case (4,400) on even higher valuations as more likely than the downside (3,300),” Parker writes. (Emphasis added.)

UBS estimates that by the end of next year, potentially 80% of the U.S. population will have received a COVID vaccine.

And while there will surely be millions of Americans who remain on guard against the virus, mass inoculation with a highly efficacious vaccine will likely return daily life to something resembling “normal” circa 2019. How the country and investors deal with a rapid return to safely enjoying life as we knew it pre-pandemic no one knows. But the positive scenarios are not terribly hard to imagine.

“We see considerable upside to services spending over coming quarters,” Parker writes.

“As a ratio of US GDP, spending on some of the most COVID impacted areas like recreation, transportation, etc. has fallen by over 2%. Thus, higher growth next year should see these spending areas get closer to ‘normal’...We see the potential rotation in spending back in favor of cyclical services consumption spending and other COVID hit areas as a key investment theme for 2021.”

A convention of the year-ahead strategy note genre involves outlining a series of events that could send stocks lower — geopolitical tensions, political upheaval, and black swan economic events are commonly cited as risks.

The net result of most year-ahead outlooks is they suggest stocks will go up over the course of the year but will go down at some points. And, indeed, this possibility remains live in the UBS outline: the “downside” scenario, again, for the market next year is 3,300.