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S&P 500: The roadmap to a record high Add to ...

The S&P 500 has been exploring its highest levels since the end of 2007, which raises a natural question: When can we expect a new record high?

The benchmark index has risen 118 per cent since the bear market ended in March, 2009. It is now just 6 per cent below its record high of 1565, from Oct. 9, 2007. Remarkably, the index has made this stunning turnaround without much help from at least one key sector: Financials are still down 54 per cent since the index touched that 2007 high.

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On Friday, Savita Subramanian, equity & quant strategist at Bank of America, initiated a 2013 target of 1600 for the S&P 500 – which is one way of answering the question about a new record high.

To get that target, she has assumed earnings growth of 7 per cent next year, along with a slight rise in market valuation. That is, she believes the S&P 500 will be valued at 14.7-times trailing earnings, up from 14.2-times earnings. As she noted, that’s still below the historical average of 16-times earnings.

Put that way, with conservative assumptions, a new record high doesn’t look like such a crazy dream. And as Ms. Subramanian points out, the S&P 500 has already hit a record high after you factor in dividends: The total return version of the index rose above its 2007 high point in April, and it is now 4 per cent above the 2007 high.

Still, this view does rest on a few sunny assumptions that bearish observers will no doubt contest. For one thing, it assumes that the United States not only avoids slipping back into recession but also reports a modest pick-up in economic growth into next year. For another, it assumes steady earnings growth this year and next.

Even with these assumptions, Ms. Subramanian believes the road-to-record highs isn’t going to be smooth. She is maintaining a year-end target of 1450 on the S&P 500, which is below the current level.

“We see an unusually high number of macro risks in the upcoming months that should cap upside or even trigger a correction,” she said in a note.

“Economic growth could disappoint in the second half and early next year, as uncertainty weighs on business and consumer spending in anticipation of the fiscal cliff. This could add to the drag on growth from the recession in Europe and decelerating trends in emerging markets.

“Add to that tensions in the Middle East, the potential for a U.S. credit downgrade and more downward earnings revisions, and we think volatility could move higher in the coming months.”

Follow on Twitter: @dberman_ROB

 
Security Price Change
SPX-I S&P 500 1,967.57 2.89
0.147 %
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