BMO Capital Markets’ chief investment strategist Brian Belski, one of the Street’s more reliably bullish prognosticators, doesn’t believe skyrocketing COVID-19 cases and spreading lockdowns will get in the way of the equity market’s upward trajectory.
On Thursday, he released his 2021 market outlook, setting a year-end S&P 500 target of 4,200 - a more than 17% rise from current levels. For the S&P/TSX Composite index, he set a target of 19,500, a rise of more than 15% that would bring it to record highs.
The forecasts have some assumptions built in. Most notably, they are contingent on one or more effective vaccines becoming publicly available sometime during the first half of next year. Plus, they assume there will be at least one more round of fiscal stimulus in the U.S. amounting to US$1-trillion or so.
“We remain optimistic and expect another year of double-digit gains as the economy and society slowly transition back to normal. As such, we forecast that the S&P 500 will rise +15% (from our 3,650 2020 year-end target) and reach 4,200 by 2021 year end,” Mr. Belski said in a note.
Key to his forecasts are that interest rates will remain historically low for the foreseeable future, which would allow for higher-than-normal market multiples when it comes to price to earnings. The bullish view is also very dependent on massive fiscal and monetary action in the U.S., which will “add another layer of strong support for continued stock market gains.”
On the earnings front, he forecasts earnings per share of US$175 for the S&P 500 in 2021, an almost 35% jump from the pandemic depressed 2020 level. He forecasts $1,100 for 2021 S&P/TSX earnings per share, an over 40% jump from 2020.
“Our expectation assumes that companies will build on the earnings recovery displayed in recent quarters, as more areas of the economy adapt and get closer to normal levels of activity throughout the year. In addition, we also believe current consensus earnings expectations are too conservative, setting up the potential for significant upward surprise in the coming quarters – similar to how the recently reported 3Q has transpired,” he said.
His forecasts for the TSX assume that the oil price remains range bound, with U.S. crude prices averaging US$50 per barrel or lower, and that gold on average remains above US$1,800 an ounce.
For the Canadian market, he also made these following sector recommendation changes:
-Communication Services to Market Weight from Overweight
-Consumer Discretionary to Overweight from Market Weight
-Consumer Staples to Market Weight from Overweight
-Industrials to Overweight from Market Weight
-Health Care to Market Weight from Underweight
-Real Estate to Underweight from Market Weight
-Utilities to Underweight from Market Weight
Why is he recommending investors lighten up on the utility sector - a favourite of dividend investors? Primarily it’s tied to his belief interest rates can only go up from here.
“Utilities is the most classic rate-sensitive sector, posting its best relative performance when interest rates are declining sharply and underperforming when interest rates start to stabilize and creep higher,” he explained. “As such, rising yields, low organic growth and high payout ratios are a tough combination. Areas to focus on would be renewables and non-regulated utilities.”
By contrast, consumer discretionary stocks are one of the first basket of stocks to rise during an economic recovery, and industrials will gain strength as manufacturing and other readings of the economy improve, he says.
“Given the strong cyclicality of the sector, strong profitability and cash generation, we are Overweight (on industrials) and believe investors should focus on the rails, select manufacturers, and waste companies – especially those leveraged to the U.S.,” he said.