After a year of massive volatility, the bull market's record streak has room to grow next year, Wall Street observers say; here's how high top Wall Street firms expect the broad-market S&P 500 will climb in 2021.
KEY FACTS
In a weekend note to clients, Goldman Sachs said it expects the S&P to end next year at about 4,300 points (indicating 17% upside), an admittedly "optimistic" forecast contingent on increased corporate earnings and a low-interest rate environment that remains favorable for corporations.
Hardly anyone's as bullish as Goldman though; Morgan Stanley, Wells Fargo and LPL Financial all have end-of-2021 targets for the S&P of 3,900, representing about 6% upside to current levels.
Wells Fargo and LPL are confident corporate earnings will surge close to 30% next year, helping to ground some of the outsized valuations in growth stocks that have pushed the average S&P valuation to more than 30 times realized annual earnings–up from about 22 last year.
On Monday, Morgan Stanley said significant outperformance among cyclical stocks–those in discretionary industries such as airlines, restaurants and hotel chains–over the past six weeks is a sign the economic recovery is well underway, adding that these stocks should "extend their newfound leadership" next year.
However, the firm also warned that a likely increase in inflation next year could reverse broad market gains, especially in "expensive growth stocks" (think: stay-at-home stocks like Zoom, Peloton and Shopify); if that happens, the S&P could plunge as much as 8% next year, Morgan Stanley noted.
On Monday afternoon, the S&P was clocking in at around 3,690 points, up 13% year to date but falling about 0.4% from Friday's closing levels as a rapidly growing Covid-19 variant in the United Kingdom roiled stock markets globally.
WHAT TO WATCH FOR
Goldman notes three downside risks to its stock-market forecast. Chief among those is a worse-than-expected vaccine rollout in the first half of the year. The firm estimates that 50% of the U.S. population will be vaccinated by April, but it also notes that "the first week of distribution has proven the logistics of proper delivery are complex." Additionally, ramped up federal spending for Covid relief measures and ongoing asset purchases by the Federal Reserve "could lead to a spike in inflation and interest rates," a trend that's historically resulted in market pullbacks (something Morgan Stanley emphasizes in its slightly more-bearish outlook). Lastly, the Georgia Senate runoffs on January 5 are still a great source of uncertainty, and could rattle markets if Democrats pull two surprise victories, but Goldman says it expects the S&P to climb regardless of what happens with elections.
CRUCIAL QUOTE
"Skeptics might say that after a 64% rally in the S&P 500 since the low on March 23, this market may soon run out of gas, but historically, the second year of previous bull markets has been rewarding for investors," says Jeff Buchbinder, an equity strategist for LPL Financial. "We think this bull market is set up potentially for a better-than-average first two years based on the experience during the 2008-09 financial crisis and an expected strong earnings rebound," he adds, saying fiscal and monetary stimulus combined with pent-up consumer demand during the pandemic should help bolster a recovery once the economy fully opens back up.
KEY BACKGROUND
Momentum stocks, and namely those in technology, have dominated the pandemic's bull market since the steep market correction in March, but the tide has shifted in the weeks since the U.S. election as the outlook brightens for value stocks. Though growth in tech stocks has decelerated, historic breakthroughs on the vaccination front and a new fiscal stimulus deal have bolstered many hard-hit industries, such as travel, financials and energy. The S&P and Dow Jones Industrial Average both closed at record highs on Thursday.
SURPRISING FACT
"The best days usually follow the worst days for the market," Bank of America equity strategists said in late November, urging investors to avoid panic selling during expected volatility in the new year. "Since the 1930s, if an investor sat out the 10 best return days per decade, his or her returns would be just 19% compared to the 16,485% returns since then." Bank of America has issued a 3,800-point target for the S&P at the end of 2021.
This article originally appeared on Forbes.
