Inflation is Coming - This Stock Might Provide Some Protection - Barron's

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2021 U.S. Market Outlook

Overview

    • Wall Street strategists are mostly optimistic headed into 2021 as the economy continues to recover from the pandemic and activity is expected to continue to strengthen after a COVID-19 vaccine is rolled out in the first half of the year. A CNBC survey of 20 sell-side strategists showed a narrow majority expecting US stocks to continue rallying into 2021, with the S&P rising between 8-20% from current levels. Twelve of the 20 predicted the S&P would rise between 4,000 and 4,500 next year, while four predicted a finish between 3,500 and 4,000, and another four expected a decline to the 3,000 to 3,500 range.
    • In addition to vaccines, some strategists also pointed to low rates and fiscal stimulus, which should provide a favorable backdrop for risk assets. However, some are more cautious given factors including delays in US stimulus, ongoing COVID-19 case growth, and the potential for vaccine shortfalls. Strategists also broadly prefer cyclical groups that will benefit from a re-opening, which would continue the trend from Q4-2020, though some also said low rates from a continuation of the monetary policy tailwind could also continue to help the momentum and growth names that led the markets in the first three quarters of 2020.
  • Bank of America:
    • 2021 S&P 500 Target: 3,800 (2.6% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,300
    • Savita Subramanian and team said they expect the S&P 500 to rise to 3,800 by the end of next year, arguing the outlook is positive given reopenings and a vaccine-driven recovery, but that much of the optimism is already priced in. The team sees EPS rising 20% y/y to $165, slightly below the 2019 peak of $163, but weighed down by weaker 1H-21 expectations before a robust 2H recovery. They also see value outperforming growth on vaccine news, the profit and economic cycles, and investor positioning. Subramanian and her team see financials and energy as the market leaders next year, and staples, real estate and comm services as the laggards, but also said they prefer small to large amid expectations for a strong US economic recovery.
  • Barclays:
    • 2021 S&P 500 Target: 4,000 (8.0% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,300
    • Maneesh Deshpande and team said put a 4,000 price target for 2021 on the S&P 500, with an EPS estimate of $173. The team said they see a trifecta of positive developments of a decisive Biden victory, divided Congress, and vaccine optimism, and expect corporate earnings to continue to surprise to the upside on those developments. They also said they expect value to outperform growth, but expect a rotation back toward growth as the COVID-19 tailwind for value dissipates.
  • BMO Capital Markets:
    • 2021 S&P 500 Target: 4,200 (13.4% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,400
    • BMO's Brian Belski called a 2021 S&P price target of 4,200, a 15% gain from his revised 2020 target of 3,650. He also put his 2021 EPS estimate at $175, or a 35% gain from the pandemic-depressed 2020 level. Belski said he expects another year of double-digit market gains as the economy and society transition back to normal, while the market will hold onto an elevated multiple given historically low interest rates and massive monetary and fiscal stimulus. Belski said he sees the market moving away from being momentum-driven like it has over the past year and toward a broader, more fundamental performance.
  • Credit Suisse:
    • 2021 S&P 500 Target: 4,050 (9.4% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 2,925
    • Jonathan Golub put a 2021 price target of 4,050 on the S&P 500 based on EPS of $168, though he expects multiples to contract from 21.9x today to 21.3x by year-end 2021 as earnings grow into the current elevated valuation. Golub said his 2021 call is based on the 2022 outlook, as he expects the virus to be a fading memory and the economy robust but decelerating, a steeper yield curve, lower volatility, and the rotation into cyclicals largely over. While Golub said financials and cyclical groups should benefit from a value tailwind, he also said the TECH+ case remains compelling and still recommends a positive bias toward this group.
  • Deutsche Bank:
    • 2021 S&P 500 Target: 3,950 (6.7% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,250
    • Binky Chadha set a 2021 S&P price target of 3,950 based on a 20.5x multiple and $194 EPS. Chadha said the aggressive earnings estimate is based on earnings grow is based on expected strength in mega-cap growth stocks and tech, which are tied to global growth and the dollar followed by defensives, cyclicals, and Financials and Energy, two sectors expected to catch up after having had no trend in earnings for over a decade. He also said he expects the market multiple to de-rate but remain elevated as retail investor participation holds up.
  • Goldman Sachs:
    • 2021 S&P 500 Target: 4,300 (16.1% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,400
    • Goldman Sachs economist David Kostin set a 2021 S&P 500 price target of 4,300 (and 4,600 for 2022), citing the stronger-than-expected rebound in earnings in Q3, which he expects to rise to $175 next year (and $190 in 2022). While Kostin said value groups will benefit from the vaccine and economic normalization, he also said he expects strength in stocks with long-term secular growth prospects that have high growth investment ratios. Kostin also wrote that margins could be held up by the slack in the labor market as there is likely to be limited wage growth.
  • Jefferies:
    • 2021 S&P 500 Target: 4,200 (13.4% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,300
    • Sean Darby set a 2021 price target for 2021 at 4,200 on 30% EPS growth to $180. Darby cited factors including easy monetary policy, a weak dollar, a rebound in the old economy, and a synchronized global upswing. He also said he expects US GDP growth of 4.5% and a vaccine rollout as tailwinds for growth, while the breadth of earnings will help both cyclicals and value stocks. Darby said value groups should outperform, including banks, while industrials and materials could benefit from a weak dollar environment, an upswing in global manufacturing, and China's accelerating credit impulse. However, he cautioned there there is still some uncertainty given the Georgia Senate elections, and risk overhangs from higher inflation expectations and potential delays to the stimulus bill.
  • JPMorgan:
    • 2021 S&P 500 Target: 4,500 (8.0% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,400
    • Dubravko Lakos at JPMorgan called for a 2021 year-end price target of 4,500, arguing that many of the key risks have subsided, including elections, the pandemic, and vaccine news, which cleared the way for a more positive outlook. Lakos also argued that central bank policy will continue to be accommodative and a major pillar of support for equity multiples. Lakos also said that positioning has been light and below average levels for systematic quants, and a continuation of volatility compression should help drive a re-leveraging process further supporting equity multiples. Lakos also noted that rising rates could become a headwind if they continue to increase, but said the 10-year yield would have to move up to 1.50% to make the team less comfortable with holding US equities.
  • Morgan Stanley:
    • 2021 S&P 500 Target: 3,900 (5.3% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,000
    • Michael Wilson set a 2021 price target of 3,900 for the S&P 500, based on earnings of $193 and a 20.25x multiple. Wilson said that he expects cyclicals to outperform, including financials on rising rates and better credit, as well as materials and industrials on a demand rebound, earnings leverage, and inflation protection. While Wilson was not concerned about the potential impact of peak Fed (which he sad was in August when the bank signaled average inflation targeting without yield curve control) and valuations, he warned that yield curve control would be a counterproductive policy for equity markets. Wilson said the policy wouldn't do much to help the Fed's inflation goal, and if rates don't move higher in the next 6-12 months, he would consider that a failure of both monetary and fiscal policy, and would then turn bearish on US equity markets.
  • RBC:
    • 2021 S&P 500 Target: N/A
    • 2020 S&P 500 Target: 2,900
    • RBC's Lori Calvasina and team temporarily suspended the 2021 price target and EPS forecasts. The team said they expect that the recovery has room to run from a fundamental perspective, though noted the key risk to US equity markets next year is that the recovery is already mostly priced in. The team said that the recovery in the S&P mirrors that of the 2009 financial crisis, and if the index continues down that 2009 recovery path, it would peak at nearly 3,900 in the year ahead. However, the team warned that US equities have started to look over-owned again based on CFTC data and retail investor positioning, which has stretched valuations for both 2021 and 2022.
  • Stifel:
    • 2021 S&P 500 Target: 3,800 (2.6% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 2,800
    • Barry Bannister and team set a year-end 2021 price target of 3,800 on the S&P 500. Bannister warned that his EPS outlook is below consensus, and expects Street estimates to fall 11% by the spring due to a sluggish recovery. He also warned about valuations, saying that if the S&P 500 rises to ~3,900, the cyclically-adjusted P/E ratio equals 1936 and 1966 peaks, and the market could only go significantly higher in a bubble. He also cautioned that the Fed risks an inadvertent taper tantrum if inflation falls and real yield spikes, which would be a risk to P/E ratios.
  • UBS:
    • 2021 S&P 500 Target: 4,100 (10.7% implied gain as of 8-Dec close)
    • 2020 S&P 500 Target: 3,200
    • UBS economist Keith Parker said that he expects the S&P to rise to 4,100 by year-end 2021, based on a 2022 EPS of $205 and a forward P/E of 20x. He said he sees the gains frontloaded in the first half of the year, with the prospect of 4,000 by Q2. Parker said the vaccination pace will be the key driver of US equities, which would help push real services consumption growth of 10% SAAR in 2H-21 (and push down real good consumption) to the benefit of cyclicals. Parker said he sees a low bar for Q4 and Q1 earnings, though that would set up a large and broad earnings upgrade through April. He said that the biggest gains will come from stocks most sensitive to a vaccine (including airlines, banks, and energy), where forward earnings fell ~44% from February until now.

 

2021 European Market Outlook

  • Overview:
    • Equity strategists covering Europe have issued 2021 outlook reports in recent weeks and the general consensus seems to be of a significant rebound in EPS growth, which is strongly tied to the macro recovery expected in the region in the year ahead.
    • They all have cited a stabilization in macro conditions, fueled by a vaccine-related drive in Q2 and Q3 which will see a broader reopening of the European economy. That, they say, will be assisted further by ongoing fiscal stimulus and loose monetary policy.
    • The reflationary narrative in general seemingly favors the value vs growth trade, which strategists believe will define most of next year and have bullish ratings on cyclical sectors over defensive sectors. Some have Europe as their preferred region.
    • Downside risks include renewed lockdowns if the pandemic is not under control, a no-deal Brexit outcome, together with fiscal slippages in the EU's recovery and stimulus package, which is viewed as a major positive of sustained European growth.
  • Strategist Commentary:
    • Emmanuel Cau at Barclays says:
      • Equities saw one of the biggest value outperformances on record in November. Some consolidation thus seems logical, but most investors have underperformed and 'FOMO' might prompt them to chase the rally and look through the short-term risks.
      • With a return to normality, the big picture is supportive, and European equities are expected to reach new highs in 2021, as the flight to safety unwind might be just starting and high-efficacy vaccines should bring the COVID-19 pandemic under control.
      • Earnings to rebound strongly, by c.40-45% (p.36). Very easy comps, positive delta in activity boosting top line and effective cost control driving margins expansion should all help European earnings in 2021, with Value and Cyclicals leading the rebound.
      • Along with expansionary monetary and fiscal policies, this should lead to a strong cyclical upswing. Central banks and governments have ammunition left to help sustain the recovery, financial conditions are favorable, and there is lots of pent-up demand.
      • Equities are cheaper and less owned than bonds. P/E's are stretched, but bond yields are depressed. As long as yields go up for the 'right reason', equities should be natural beneficiaries and the valuation gap between growth and value should narrow.
      • Post the recent market rally, there is room for continued medium-term rotation out of the still-crowded relative safe havens - bonds, cash, DM, US, growth and defensives, and into the less-owned riskier assets - equities, EM, Europe, value and cyclicals.

 

    • Mislav Matejka at JPMorgan says:
      • Firm looks for positive equity returns in 2021, with target upside of 15%, driven by a strong rebound in earnings, from what are very depressed levels. P/E multiples might hold on to most of their rerating, as bond yields are not expected to move significantly higher.
      • Monetary policy should remain supportive, trade uncertainty could ease and the fiscal stimulus will likely continue to be rolled out. Firm turned bullish on value at the start of November and thinks that broadening in market participation will extend into 2021.
      • Growth vs value run that took place up to November 2020 dwarfs anything seen before. Technology continues to screen well fundamentally, but a significant gap has opened up between its superb performance, up as much as 33% ytd, and the stalling relative EPS revisions.
      • Banks had a poor year but the sector is up a big 33% mtd, as banks continue to show attractive valuations, stabilizing EPS, possible dividend return, credit spreads holing up, balance sheets not needing to be diluted, and any move in bond yields could lead to multiple expansion.
      • Regionally, Eurozone and EM ex Asia have lagged US and China significantly this year but there is scope for narrowing in these performance spreads. Recently moved EM vs DM to OW, and now we take profits on US-Eurozone trade. Upgrades Eurozone to OW, and reduce US to Neutral.
    • Sebastian Raedler at Bank of America says:
      • Firm expects the euro area PMI to rebound from 44 in November to 50 in January and to a recovery high of 60 in June, as fading European virus cases, a vaccine roll-out and US fiscal stimulus help the still-depressed parts of the economy to return to normality.
      • However, much of the good macro news is already in the price: after a 15% rally this month and a 40% rise since March, Stoxx 600 is already priced for a PMI at 54. Firm sees 12% upside for the Stoxx 600 to 440 by Q3 and 5% upside to end-2021 target of 410.
      • Looks to re-enter the market at more attractive levels to position for further recovery upside. Stays marketweight European cyclicals versus defensives and overweight value vs growth, after the firm had lowered its stance from overweight in late October).
      • Expects a recovery peak ~15% above current levels in Q3. As for the market overall, firm hopes to re-enter a procyclical position at more favorable levels once the vaccine optimism has cooled. Stays overweight value vs growth and keeps European as overweight.
      • Lifts Germany from marketweight vs overweight given expectation of vaccine-enabled macro recovery. Lowers France from overweight vs market weight with most of the good news now in the price. Keeps overweight UK, Italy and Spain but underweight on Switzerland.
    • Graham Secker at Morgan Stanley says:
      • European equities look well positioned for 2021 as growth rebounds strongly and policymakers stimulate into the recovery; firm sees 11% upside for MSCI Europe and prefers cyclicals to defensives and value over quality as a global reflationary narrative finally gains traction.
      • With the EU Recovery Fund due to kick in later in 2021, firm sees the potential for three years of strong, above trend GDP growth for the region; it model 30% EPS growth in 2021 and 20% in 2022. PE ratio to stay elevated even as EPS recovers - 11% upside for MSCI Europe.
      • In previous cycles, equity PE ratios have tended to peak early and then de-rate sharply as earnings rebound. However, the firm expects equity valuations to remain elevated next year as central banks continue to ease into the recovery and equities re-rate versus bonds.
      • A global macro backdrop of strong growth, rising inflation and higher bond yields (Morgan Stanley's bond strategists expect US 10Y yields to reach 1.45% by Dec-21) suggests that a reflationary narrative should finally take hold next year after previous 'false dawns'.
      • Such a narrative should favor financials, cyclicals and value over defensives, growth and quality. Firm is bullish on financials, mining, construction, transport, consumer services and media. Bearish on consumer staples, pharma, software, food retailing and telecoms.
    • Nick Nelson at UBS says:
      • Firm targets 420 (Stoxx 600) for end-2021, which points to ~8% price upside and a total return of 11% (or 17% in USD, given UBS expectations of a stronger Euro). Also forecasts +35% EPS growth in 2021, +12% in 2022 and target a fair value P/E multiple of 17x.
      • Upside scenario is 490 (+~26%). Potential catalysts include: faster vaccine progress, greater fiscal support, rotation out of fixed income into equities and US investors returning to Europe with likely EPS growth noticeably above the US for the first time in 17 years.
      • Downside risks include renewed lockdowns, a "no deal" Brexit and any signs of slippage in EU policy response (such as the EU Recovery Fund). Also, the reversal of the leg-up in valuation gaps during this crisis is a clear risk, but the bulk of the dispersion was already high.
      • Cyclicals have shown very sharp outperformance since market lows in March; none of the 17 best performing sectors are defensive. Firm expects cyclicals to continue to lead in 2021 and maintain a pro-cyclical view; however, believes the market will be less one-sided.
      • Firm highlights it sees 5 key drivers of positioning into 2021; (1) normalization of mobility/reopening, (2) fiscal stimulus, (3) consumer upside from savings accumulated in lockdown, (4) euro strength and (5) recovery trajectory especially for yields/inflation.
    • Sharon Bell at Goldman Sachs says:
      • Firm's European economists recently downgraded their Q4 GDP forecasts in the light of the new containment measures across Europe, taking down estimates by 4-6pp across different countries, but the hit firm expects to aggregate demand is less than in the spring.
      • This is because lockdowns are less stringent, the starting point is different, and manufacturing and construction should continue to operate this time. Services will take the largest hit, but even in this case likely much less than in the spring given adaptions already in place.
      • A weak Q4 does mean that this year's EPS will probably be a little softer; firm now expects 2020 EPS to fall -38% but remains constructive on the European recovery beyond the winter, given vaccine expectation by Q3, strong global growth and sustained monetary and fiscal support.
      • Expects GDP growth of 5.3% and 6.1% for the euro area and the UK respectively in 2021, which should drive EPS acceleration; it is not the level of GDP itself or indeed the level of GDP growth that drives earnings so much as the change in GDP growth (acceleration or deceleration).
      • The firm said this should be especially strong as we reach an inflection point in early 2021. Indeed, Europe had a flavor of this in the Q3 results season, which was exceptionally strong as companies enjoyed an improvement in both top line and margins as economies unlocked.
      • Given this, it expects earnings to be up 50% in 2021 and 12% in 2022. That said, after the sharp decline in 2020, and the damage to certain industries - such as travel and leisure, energy, financials -it will take to the end of 2022 to get back to the 2019 level of EPS in Europe.