RBC Capital Markets is a little late in issuing its forecast for U.S. stock market returns for the year ahead - but investors aren’t likely to complain too loudly.
Its equity team, led by Lori Calvasina - who just returned from a maternity leave that delayed the bank’s forecasts up until now - on Wednesday issued a 2021 target for the S&P 500 of 4,100. That would represent a healthy full-year gain of 9 per cent, and no doubt help propel other global market indexes, including Canada’s TSX, to extend their recent record highs.
Still, it would translate into a more moderate return than 2020′s 16-per-cent gain, and RBC cautions that there’s likely to be a pullback in equity values before seeing those types of levels - and it may happen soon.
“While we expect 2021 will be a solid year, it comes with risk,” RBC said in its U.S. Equity Market Outlook. “We anticipate a period of consolidation, most likely in the first half. It could be as mild as a mid-single digit decline from the recent highs (taking the S&P 500 to about 3,600) or as deep as a drop in the mid teens (about 3,200). Our positioning/sentiment analysis suggests a pullback could start any time, but could also take a few more weeks/months to materialize.”
RBC isn’t quite as bullish as Goldman Sachs, whose forecast issued at the end of 2020 sees the S&P 500 reaching 4,300 this year. Similarly, it’s a little under BMO Capital Market’s year-end target of 4,200.
But it does provide more encouragement than Wall Street giants Morgan Stanley, Wells Fargo and LPL Financial, all of which set a target of 3,900 for this year.
The RBC analysts, led by Ms. Calvasina, expect 2021 to be “a year of resilience, recovery, and realignment.” Much hinges, of course, on vaccines helping to mitigate the impact of COVID-19-related shutdowns on the economy. But they believe the forward-thinking market will price in better days for corporate earnings well before they arrive. The bank sees earnings per share for the S&P 500 robustly rising 23 per cent to US$168 in 2021, and then a further 9 per cent to US$183 for 2022.
“Ultimately, 2021 price action will reflect 2022′s fundamentals. Longer-term risks to the market and our bullish full-year view include higher corporate taxes, tech/internet regulation, a less accommodative Fed, and the virus/vaccine backdrop,” the analysts said.
Since September, beaten-down value sectors of the market have made a comeback against the high-flying growth and technology stocks that took off as the pandemic and stay-at-home lifestyles took hold.
RBC thinks this shift in sector leadership has legs, and cyclical stocks that may be undervalued as economies recover will continue to benefit. That could also mean other global stock indexes that have more weighting toward cyclicals could see even stronger gains than the S&P 500.
“We expect US equities to lag non-US equities, Value to outperform Growth, and Small Cap to outperform Large Cap. These are full year views, and we’d expect these trades to pause in a pullback,” RBC said.
Sector-wise for the S&P 500, RBC is most bullish on financials, materials and energy - stocks which Canada’s stock market is full of. It believes investors should underweight REITs, consumer staples, and communication services.
RBC Economics expects real GDP in the U.S. to hit 5 per cent this year. Historically, the S&P 500 has risen about 9 per cent in years when GDP growth has been that strong, the bank said. “Interestingly, the S&P 500′s average return in years prior to a super charged GDP growth year has been 16% - exactly what the stock market accomplished in 2020,” it said.
“We think this test does a good job of illustrating why the S&P 500′s move was so strong in 2020 despite the massive hit to the economy from the pandemic, and why the index’s gains are likely to be a little more subdued in 2021.
Other factors have encouraged RBC to predict high single-digit returns for 2020. That includes the historical impact elections have on the market: the S&P 500′s full year return has averaged 9 per cent in years in which the White House, House of Representatives, and Senate are all controlled by Democrats
Rising corporate confidence, high cash levels, and a pickup in buyback announcements have also contributed to RBC’s bullish outlook.
“The economic and policy backdrop for stocks also seems favourable, with rising GDP forecasts, an accommodative Fed, consumer-friendly fiscal stimulus on the way, and a united government in Washington that should be able to make it happen. While there have been, and will likely continue to be, some wobbles in the short-term alternative economic indicators that have become widely tracked by investors, none of the wobbles seen so far suggest that a double dip recession is on the horizon. As trends in this data continue to evolve, we think it’s important to keep in mind that US consumers and corporate executives have demonstrated their resiliency and adaptability time and time again in recent years, not just during the pandemic but throughout the past few years in the face of several major challenges,” RBC said.
For the short term, one of RBC’s biggest concerns are those sentiment indicators that are looking stretched. That includes net long positions among asset managers for U.S. equity futures pulling above their 2007 and 2018 highs, and an elevated level of net bullishness in AAII investor surveys.
RBC also incorporated what the charts are saying in setting this year’s S&P 500 target. Its technical strategy team sees 4,135 as the next major resistance level for the S&P 500.
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