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

Emily McCormick
·5 min read

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.

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 lik

ely 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

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

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