Strategists see more stock market gains through the end of the year

The first month of the new year has not even ended yet, and Wall Street firms are already building a case for stocks to rise even further this year.

With the composition of the government now confirmed and Democratic lawmakers in control of both the U.S. House of Representatives and Senate, strategists are preparing to see more fiscal stimulus boost consumer spending, the economy and corporate profits in the coming months. This is set to lay the groundwork for a strong recovery once the vaccine rollout reaches much of the population, many have said.

Still, these risk-on catalysts will likely come alongside some opposing forces, including rising interest rates and the specter of a less accommodative Federal Reserve and higher corporate taxes as the economy emerges from the pandemic.

But on net, with all these factors in mind, a number of strategists suggested stocks will rise even more strongly this year than they believed at the end of 2020.

Here’s what some Wall Street strategists are now expecting for the U.S. stock market this year.

Deustche Bank (Target: 4,100; EPS: $202): Equities likely to rise, pull back briefly, then rally to new highs by year-end

Deutsche Bank equity strategist Binky Chadha now sees even more upside for equities, with additional fiscal stimulus set to boost an economy already in the early innings of a post-pandemic rebound.

“Near term, we expect equities to continue to move up, supported by an acceleration in macro growth and earnings upgrades, which are already prompting rising positioning and large inflows as is typical, and likely to be further boosted by direct and indirect flows from stimulus payments,” he wrote in a note on March 12.

“We then expect a pullback as growth peaks in Q2 at a high level,” he added. “The more front-loaded the impact of the stimulus, the sharper the peak in growth, and the closer this peak in macro growth is to warmer weather (giving retail investors something else to do); and to an increased return to work at the office, the larger we expect the pullback to be.”

However, he added that he then sees equities rallying back following the potential pullback and reaching 4,100 by year-end. That marks an increase from the firm’s previous price target of 3,950 on the S&P 500, and implies additional upside of 3.3% from the S&P 500’s record closing high on March 15. The firm also now sees aggregate S&P 500 earnings rising 43% to $202 this year, up from its previous $194 forecast.

By sector, Deutsche Bank said its top picks remain energy — as it forecasts West Texas intermediate crude oil will approach $80 per barrel by year-end — and financials, with the 10-year Treasury yield forecast to end the year between 2% and 2.25%.

“We move other cyclical sectors (industrials, consumer) from overweight to neutral; stay neutral the secular growth group and underweight the defensives,” Chadha said. “Across regions we are overweight the more cyclical EM [emerging markets], Europe and Japan versus the U.S, on a baseline of a global cyclical rebound.”

S&P 500 price target updated on March 12, 2021 following a price target initiation December 3, 2020

Credit Suisse (Target: 4,300; EPS: $185): ‘Accelerating GDP should result in higher revenues … and an even greater gain in EPS’

Credit Suisse strategist Jonathan Golub upwardly revised his S&P 500 price target for the second time in two months on February 23. This time, he noted that stronger-than-expected corporate profits and upbeat reopening prospects warranted a more optimistic outlook on equities.

Credit Suisse’s new year-end S&P 500 price target of 4,300 suggests upside of 10.9% from current levels. In January, Credit Suisse saw the S&P 500 ending 2021 at 4,200, and last year expected the index to rise to 4,050.

Golub now expects aggregate S&P 500 earnings per share to grow to $185 and 2021 and $210 in 2022, up from the $175 and $200, respectively, he estimated previously. Companies already entered 2021 with more profit-making momentum than expected, with fourth-quarter EPS topping estimates by 17% and unexpectedly growing on a year-over-year basis, Golub said.

And as vaccines enable the economy to open further, companies should be able to grow results even more, offering further catalysts for their stock prices. Major Wall Street banks expect, on median, that GDP will grow by 6.1% in 2021, Golub added. This would mark a sharp rebound from 2020’s COVID-induced 3.5% contraction — the worst since 1946.

“Accelerating GDP should result in higher revenues (every 1% in GDP is a 2.5-3% change in sales), and an even greater gain in EPS given operating leverage,” Golub added. “Additionally, rising rates — a benefit to Financials — and copper and oil prices — a boon for Industrials, Energy, and Materials — further augment this favorable backdrop.”

S&P 500 price target updated on Feb. 23, 2021, following a prior update on Jan. 7, 2021

Goldman Sachs (Target: 4,300; EPS: $181): ‘Fiscal stimulus should support consumer-facing cyclicals’

Goldman Sachs raised its S&P 500 earnings outlook this month, citing an unexpected bump higher in corporate earnings results as companies rebounded faster than expected from pandemic-related disruptions.

“Analysts expected 4Q S&P 500 EPS would fall by 11%, but results showed +2% year/year growth,” the strategists led by David Kostin said in a note published Feb. 12. “We raise our S&P 500 2021 EPS estimate 2% to $181 (from $178), reflecting higher sales and profit margins that should overcome input cost pressure due to high operating leverage.”

Despite the improved earnings outlook for this year, Goldman Sachs left its S&P 500 price target at 4,300, implying 9.3% upside from the index’s record close on Feb. 12.

Fiscal stimulus will likely comprise the next catalyst for U.S. equities, Kostin added, as lawmakers in Washington work toward another robust round of virus relief measures that would stoke consumer spending and further boost corporate profits.

“Many investors believe the spending boost will lead to higher inflation and interest rates, which would reduce the value of equity duration and increase the importance of near-term growth,” Kostin said. “Fiscal stimulus should support consumer-facing cyclicals and our High Operating Leverage and Low Labor Cost baskets.”

The firm highlighted a number of cyclical stocks that appeared appealing due to correlations with consumer spending and strong earnings growth over the past year, including Whirlpool, Charles Schwab, 3M and Facebook.

Updated EPS target as of Feb. 12, 2021, following a prior update on Jan. 8, 2021

Bull Pawing the Ground (Photo by: Digital Light Source/Universal Images Group via Getty Images)

Bull Pawing the Ground (Photo by: Digital Light Source/Universal Images Group via Getty Images)

RBC Capital Markets (Target: 4,100; EPS: $168): ‘While we expect 2021 will be a solid year, it comes with risk’

RBC Capital Markets released its initial year-end outlook for U.S. equities on Jan. 20. In this, RBC said it expected the S&P 500 would ultimately end the year at 4,100, implying upside of 9% from closing prices on Jan. 19. One of the key drivers of the rise will come amid the expected economic reopening, with RBC estimating real gross domestic product will grow 5% in 2021.

Before ending the year higher, however, stocks are likely to endure a pullback as traders take a pause after 2020’s 16% rally and extended gains so far this year.

“While we expect 2021 will be a solid year, it comes with risk. We anticipate a period of consolidation, most likely in the first half,” the strategists led by Lori Calvasina said in a note.

The drop could come as a mid-single digit decline from the index’s recent record highs, taking the S&P 500 down to about 3,600, the firm said. But it could also be an as much as mid-teens correction that pulls the index back down to approximately 3,200, it added.

“Our positioning/sentiment analysis suggests a pullback could start any time, but could also take a few more weeks/months to materialize,” Calvasina said. “Ultimately, 2021 price action will reflect 2022’s fundamentals. Longer-term risks to the market and our bullish full-year view include higher corporate taxes, Tech/Internet regulation, a less accommodative Fed, and the virus/vaccine backdrop.”

S&P 500 price target initiated Jan. 20, 2021

This article was originally published in January 2021.

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

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