(Bloomberg) One of Wall Street’s biggest equity bears just capitulated as stocks approach record highs.
Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, raised his year-end target for the S&P 500 to 3,050 from 2,850, going from the fourth-bearish among Wall Street prognosticators tracked by Bloomberg to one of the few who still see gains for the rest of 2019. The new target represents a 1.4% increase from Friday’s close.
His optimism is built on a scenario where a glut of supply has dwindled, setting the stage for a recovery in production. Industries such as semiconductors have suffered profit declines amid excessive inventory, and earnings among S&P 500 companies are expected to fall 3% in the third quarter before rebounding to a growth pace of 3.8% in the fourth, analyst estimates compiled by Bloomberg showed.
“A required inventory correction is ending, with production likely to pick up modestly just to meet end-market demand,” Levkovich wrote in a note to clients. “As a result, 4Q19 earnings estimates may not need additional trimming.”
Stocks just finished a third week of advances, lifting the S&P 500 above 3,000 for the first time since July. Shares bounced back from an August sell-off as the U.S. and China agreed to start trade talks and major central banks around the world continued to easy monetary policy.
Strategists have been forced to catch up to a rallying market that has pushed the S&P 500 up 20% this year. Based on the last Bloomberg survey, all but six of the 21 strategists have seen the benchmark exceed their year-end targets. In July, David Kostin at Goldman Sachs raised his forecast by 100 points to 3,100.
While shares have gone up, investor sentiment is far from bullish. In fact, Citi’s Panic/Euphoria Model recently showed near-panic readings. The rotation from growth and defensive stocks to value is likely to continue, helping drive the market in coming months, according to Levkovich.
“An overshoot to 3,150 is possible,” he said. “Client pushback against shifting away from growth and defensives is quite firm, intimating existing portfolio positions, with a potential continuation of this kind of rotational ‘pain trade.”’
