The 2021 stock market lookaheads are coming fast and furious now. Here are excerpts from a report by J.P. Morgan that is one of the most bullish on Wall Street.
Their research team sees a variety of factors allowing the good times to keep rolling.
J.P. Morgan’s views are supported by some interesting charts showing money supply, the velocity of money, corporate balance sheets and earnings guidance sitting at historically supportive levels for the stock market:
Equities are facing one of the best backdrops for sustained gains next year.
After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, US election uncertainty, etc.), the outlook is clearing with the business cycle expanding and risks diminishing.
We expect a “market nirvana” scenario for equities with the melt-up continuing into the second half of 2021, driven by earnings recovery and multiple expansion.
We expect next year to be front-loaded with most of the market upside realized in the first six months of the year, driven by:
- Expectations of continued exceptionally easy monetary policy (US M2 money supply +24% y/y, largest increase since 1940s) and another round of fiscal stimulus ($700-900 billion) in the near future.
- COVID-19 vaccine distribution and easing of mobility restrictions fueling further earnings, labour market, and business cycle recovery (e.g. our leading business cycle indicator, has entered early expansion phase).
- Election outcome with an expected balance of power and likely legislative gridlock is a goldilocks scenario for equities in our view (although Georgia senate race remains a key short-term risk). This expected election outcome significantly reduces risk of higher taxes and regulatory tightening, and increases the likelihood of global trade tensions easing and some tariff rollbacks.
- Steady decline in US dollar trade-weighted index (-11% since March peak and -5% since 1 year ago) is expected to be a significant tailwind for multinational earnings in the coming quarters and for broader liquidity conditions.
- Corporates should begin to release excess balance sheet cash starting next year (S&P 500 record cash balance at ~$2.1 trillion ex-Financials), revitalizing capital expenditure, mergers and acquisitions, and capital return, and reducing debt/revolvers – positive for earnings/multiple.
- We expect ~$1 trillion of equity inflow / demand in 2021 driven by systematic flows, hedge fund positioning, retail buying, share buybacks, rotation from non-equity into equity.
Given the above, we see the S&P 500 reaching 4,000 by early next year.
Our base case S&P 500 price target for 2021 is 4,400 with a range of 4,200 to 4,600. Our 2021 earnings per share estimate (EPS) estimate is $178 (consensus $168.85) and 2022 EPS is $200 (consensus $196.79).
We expect next year to be front-loaded in terms of performance.
While the broader backdrop should still remain constructive in the second half of next year, by then the market will have likely priced in close to a full recovery and investors may start to expect a gradual shift in central bank forward guidance away from the current exceptionally accommodative stance.
This could start to pressure the multiple expansion story, making any market upside increasingly dependent on future earnings growth potential.
As such, we expect investors to become increasingly more selective in the second half of 2021.
We expect the elevated equity multiple to be resilient as upward pressure on bond yields should continue to be restrained by the Fed, while equity risk premium is currently still elevated offering room to absorb moderately higher yields.
We expect ~$1 trillion of equity inflow / demand in 2021.
Equity positioning relative to a longer-term historical context is still below average with ample room for mechanical re-leveraging as volatility level subsides. Our Volatility Outlook is for VIX to decline to an average of ~17 in 2021 (vs. ~28 in 2020).
Decline in volatility creates a positive feedback loop, where systematic and discretionary hedge fund strategies increase allocation to equities.
This process may take most of 2021, as economic recovery as well as inflows in the risky strategies are likely to be gradual.
For next year, we estimate at least ~$450 billion in net buybacks (increase of ~$100 billion year-over-year), continued retail buying (supported by a new round of government stimulus), and continued rotation from non-equity into equity asset class as the economy recovers and bond yields continue to see gradual upward pressure.
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