Key Indicators Point To More Upside For Equities

In conversations with clients, we are repeatedly finding that folks are not as complacent and bullish as some reports would suggest. Every client is worried about something. One of the main topics of discussion we have had with clients is whether valuations are overstretched. We would answer unequivocally that valuations are not excessive and we think they will settle at historical highs or better given the underlying secular forces supporting markets.

We analyze which direction we think valuations will go based on more than ten individual factors. The three most important factors we analyze are interest rates, inflation expectations, and where we are in the Fed policy cycle. All three of these vital indicators are at ALL TIME favorable levels. Thus, we think it makes perfect sense that valuations remain at the north-end of historical ranges or indeed even higher.

We are forecasting roughly 25% in OEPS for 2021 which would be roughly $178 for 2021. For 2022 he is forecasting 15% growth, which would be roughly $205. These forecasts are based on moderate additional stimulus. If the Dems are able to pass their $1.9 tn passed then the risk would be decidedly to the upside.

We are operating under the assumption that fair value for the S&P 500 is about 20x-22x earnings. This would mean out current upside targets are between 4100-4500. Again though, we do believe the risk for OEPS and multiples are clearly to the upside.

Growth managers have a lot of questions about what they should do. We have been recommending a bar-bell strategy anchored in growth names and have been advising our clients to augment exposure to cyclical/growth names. Our Analyst Sentiment Measure (ASM) work on growth is still constructive, so don’t abandon the area. For those uneasy about the pure Value/Cyclicals we recommend what we call ‘cyclical growth areas.’ HC Equipment, Data Processing, Movies and Entertainment and Restaurants. Our quantitative work began suggesting it may be time to start moving down the cap scale.

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