The Federal Reserve announced last week that it would allow inflation to rise above 2% as it saw necessary. With this, investors got a “green light to throw more money at the market.”
One stock market guru with more than three decades of experience says that signals a possible 30% rise in the S&P 500 over the next three years.
Sam Stovall, chief investment strategist for CFRA, based his projections on previous bull markets. He believes that we are now in a new bull market after the February-March selloff that took us into a bear market. This new bull market could last three year, he says, taking the S&P 500 to 4,500 points in 2023.
Stovall is basing his incredibly bullish outlook on forecasts from CFRA economists, who also see a v-shaped recovery. Stovall’s confidence in their forecast comes from their accuracy modeling the 32.9% second-quarter GDP decline. With this, Stovall says the group predicted almost to the percentage point.
He attributes low interest rates for the foreseeable future as a major catalyst for higher stock prices.
“Because of the intrinsic value model, using very low interest rates to forecast share prices, the lower the interest rates, the higher the projected price is,” adding “So, S&P 500 earnings divided by the Moody’s investment-grade bond yield is basically pointing to a near 30% appreciation from here.”
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Stovall’s firm expects low interest rates to lead to a 30% earnings increase for S&P 500 companies to go along with a 45% earnings increase for mid-cap companies and a doubling of earnings for small-cap stocks in 2021.
This, he says, is why Wall Street is willing to look forward with optimism. It does so all while the country is still mired in the coronavirus pandemic.
“The stock market is looking across the valley, which is looking at the second half of this year, all of 2021,” Stovall said.
From Growth to Value
Growth stocks outpaced value stocks by 24 percentage points from the March lows through late-August. With this, Stovall says it could signal the time to move away from growth and into value.
“If you’d simply plotted the percentage point differential between S&P Growth minus S&P Value, you are now more than two standard deviations above the mean,” he told me. “Last time we were there was just before the tech bubble burst.”
“So, you’ve got to say to yourself, I know all about that ‘trend is your friend’ stuff, but it can’t be my friend forever,” he continued.
Stovall expects a pullback, possibly around Election Day, which he says would be a buying opportunity.
When asked what sectors he likes, he mentioned materials and industrials.
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“Those groups that are improving in terms of relative performance, that had been underperformers for a while, are materials and industrials, which would be consistent with the expectation that the economy is likely to be improving over the coming year,” he said. “They also would benefit because they have pretty negative correlations with the dollar, because they’re so international in nature.”