As Wild Year Ends, We See 15% SPX Gain Yearend 2021, to 4300
As the year turns, many—if not most—of us are saying, “Good riddance to one of the worst years in recent history.” In my 35 years of observing markets, I can say I’ve never seen the like of it.
Put the market aside for a moment. Almost 20 million Americans have tested positive for the coronavirus (COVID-19), with over 340,000 dead. Around the world, the numbers are, respectively, 82 million and 1.8 million. Devastating. When is COVID going to release its grip on the world? Good question and look for some guidance below from Tom Lee, our head of research, who’s had an incredibly prescient track record.
And if you do look at the stock market, you have to remember the ulcerous stomach tension of March 2020, when the market fell 35% in a matter of days from the February high. America’s vaunted GDP crashed as many states, like New York and California, locked down their economies—more than once to stem the virus—to little avail. Then the US conducted a rancorous presidential election, with citizens much divided over both the response to COVID-19 and the economic way forward. The US is as riven as I have ever seen, and I voted for Gerald Ford way back when.
Andyet, the stock market roared its way to a resilient and roughly 16% annual gain. The Standard & Poor’s 500 index was around 3738 with a few hours of trading left on Dec. 31, 2020, up from 3231 tsl12 months before. It hit an all-time high of 3756 Tuesday! Notable moments include the addition of Tesla (TSLA) to the SPX, after a huge run, from $84 to $715 per share, something few predicted.
The IPO market, after the WeWork IPO disaster in September of 2018, opened up again. Wow. If you are an investor lucky enough not to have contracted COVID then you have to be happy.
So now what? Tom Lee, our head of research, has recently published his equity roadmap for 2021. If you are a subscriber you can find the report and webinar replay on the website, but we will summarize below. Remember one thing, Tom nailed it in 2020. Don’t take our word for it. Nearby is a powerful tweet from a subscriber, Zack Guzman.
OK what about 2021? Tom Lee sees 2021 as a “Cycle reversion” year, much as 2020 was about “symmetry.” He expects reversions in the VIX, in profit margins, capital spending, and consumer demand, as well as in Value stocks vs. Growth stocks. The latter have outperformed the former for years. Lee expects the new year to be the start of a new economic expansion. Pent-up demand plus massive relief and celebration of an expected pandemic finale could lead to substantially stronger than expected GDP recovery. This is what the resilience of equities in 2020 seems to suggest.
As we have been saying, the Epicenter (aka Cyclical) profit margins will likely outperform consensus in 2021-2022 due to massive cost re-engineering this year. Moreover, real interest rates are -6.0% in 2021-2022, the lowest in more than 60 years. This looks like a massive tailwind for asset heavy companies and best time to outperform Growth. “You gotta be cyclical and the profit margins story will quell doubts,” Tom Lee says.
Volatility is seen declining in 2021-2023, with VIX sinking below 20, which history shows is a major risk-on signal for Cyclicals (aka Epicenter) with 84% win-ratio. One note of caution is that we expect “a pretty big speed bump” in the 1H21, that the S&P 500 index could stall between Feb.-April and correct ~10% to 3,500 before surging into YE 2021 and our target of 4300. That’s based on a PE of 20.5X-21.0X 2022 EPS of $204-$210. Our top 3 favorite sectors are: Industrials, Consumer Discretionary and Energy. Tom’s long shot sleeper is Energy because of capital scarcity.
Restructuring and cost cutting will improve margins, and an expected continuation in the U.S. dollar drop will boost earnings per share. We see $141-$145 SPX EPS in 2020 and $177 in 2021, though that could be conservative. This is a solid backdrop if rates and inflation stay low. The acceleration of growth is due to the anticipated recovery in PMIs both US and globally.
As is the case any time with financial markets, plenty can go wrong and here are a few of many that Tom Lee has singled out: COVID-19 could mutate; election turmoil redux; vaccine doesn’t work; USD crashes; interest rates surge; sudden Biden health issues; and an IPO bubble; among others.
Bring on 2021!
