With the economic recovery well under way and the stock market hovering just below all-time highs, Wall Street firms are building a case for stocks to keep climbing into the end of 2021.
Corporate earnings results have handily exceeded expectations for the first three months of the year, with companies' sales and profits getting a boost from surging demand as economic activity picks up. Jobs are coming back and consumer and business spending has been elevated – and companies have reaped the rewards.
Still, concerns linger about the pace of the recovery into year-end, and questions remain around when the Federal Reserve might pull back its aggressive monetary policy support. The specter of higher corporate and individual taxes is also on the table, generating concerns of higher costs. And with demand outpacing supply, inflation risks are also being closely watched.
But on net, even with all these factors in mind, a number of strategists suggested stocks will keep climbing. However, with stocks already up 11.6% for the year-to-date through market close on May 3, much of this year's gain has already taken place, many suggested.
Here’s what some Wall Street strategists are now expecting for the U.S. stock market for the rest of 2021.
RBC Capital Markets (Target: 4,325; EPS: $187): Stocks to grind higher by year-end, but 'expect a pullback or heightened volatility in the market before the year is done'
RBC Capital Markets slightly upgraded its outlook on S&P 500 earnings, citing a stronger outlook for corporate profits this year. However, the outlook also takes into account some offset from expectations for an increased corporate tax rate, and suggests stocks may see a pullback before year-end after an exceptionally strong first several months of the year.
The firm's new price target on the S&P 500 is 4,325, up from the 4,100 seen in January. This would imply additional upside of 3.2% from closing levels on May 4. RBC also now sees S&P 500 earnings per share (EPS) growing to $187 this year and to $200 in 2022, up from the firm's previous view for $177 and $193, respectively.
"Our new price target now accounts for some slight multiple expansion (from 20.1x to 21.6x on forward [price-earnings multiples]) commensurate with the modest expansion we are seeing in the Fed’s balance sheet (previously we assumed a flat forward P/E)," RBC Capital chief strategist Lori Calvasina wrote in a note May 4. "Our new EPS forecasts bake in better margins and buybacks than our previous forecast, along with a moderate (~4%) increase in the effective tax rate for the S&P 500 in 2022 due to our expectation that the Biden White House will be successful in passing a compromise increase in the corporate tax rate that takes effect next year."
"The signal that we are sending with these moves is that we see a little more room for stocks to climb higher this year, but that we also continue to expect a pullback or heightened volatility in the market before the year is done capping that upside," she said.
Calvasina added that she continues to believe "2021 will end up being a strong year in the U.S. equity market, supported by a strong economic backdrop, high levels of corporate confidence (which should support cash deployment trends), and ample monetary and fiscal stimulus (we think investors aren’t paying enough attention to the spending side of Biden’s aspirations)."
"But we also continue to view euphoric investor sentiment/positioning, the peak in the growth rate of S&P 500 EPS that’s likely underway at the moment, and uncertainty over tax policy as an overhang on stocks in the months ahead," she added.
S&P 500 price target updated on May 4, 2021; S&P 500 price target initiated Jan. 20, 2021
Credit Suisse (Target: 4,600; EPS: $200): 'Every 1% improvement in nominal GDP translates to a 2.5%-3% gain in S&P 500 revenues'
Credit Suisse strategist Jonathan Golub upwardly revised his S&P 500 for a third time in the last six months on April 30.
This time, Golub said an even stronger outlook on corporate earnings and upbeat prospects for the economic expansion warranted a more optimistic stance on equities.
Credit Suisse's new year-end S&P 500 price target of 4,600 suggests upside of 9.7% from current levels. In January, Credit Suisse saw the S&P 500 ending 2021 at 4,200, and last year expected the index to rise to 4,050.
Golub now expects aggregate S&P 500 earnings per share to grow to $200 and 2021 and $185 in 2022, up from the $185 and $210, respectively, he estimated previously.
"Consensus GDP forecasts call for 6.3% real (8.6% nominal) growth in 2021, the fastest pace in nearly four decades. Every 1% improvement in nominal GDP translates to a 2.5-3% gain in S&P 500 revenues, and additional improvement in margins, as fixed expenses are amortized over greater sales volume," Golub wrote in a note. "While companies might bemoan higher input costs, history shows that rising commodity prices lead to margin upside as companies pass on additional costs."
Golub added that "analysts tend to underestimate operating leverage" in the early stages of an economic cycle. Positive revisions could last another two to three years, he added, with rising expectations helping support additional upside in equities as well.
S&P 500 price target updated April 30. Previously, this firm's S&P 500 price target was updated on Feb. 23, 2021, and on Jan. 7, 2021
Deutsche Bank (Target: 4,100; EPS: $202): Equities likely to rise, pull back briefly, then rally to new highs by year-end
Deutsche Bank equity strategist Binky Chadha now sees even more upside for equities, with additional fiscal stimulus set to boost an economy already in the early innings of a post-pandemic rebound.
"Near term, we expect equities to continue to move up, supported by an acceleration in macro growth and earnings upgrades, which are already prompting rising positioning and large inflows as is typical, and likely to be further boosted by direct and indirect flows from stimulus payments," he wrote in a note on March 12.
"We then expect a pullback as growth peaks in Q2 at a high level," he added. "The more front-loaded the impact of the stimulus, the sharper the peak in growth, and the closer this peak in macro growth is to warmer weather (giving retail investors something else to do); and to an increased return to work at the office, the larger we expect the pullback to be."
However, he added that he then sees equities rallying back following the potential pullback and reaching 4,100 by year-end. That marks an increase from the firm's previous price target of 3,950 on the S&P 500, and implies additional upside of 3.3% from the S&P 500's record closing high on March 15. The firm also now sees aggregate S&P 500 earnings rising 43% to $202 this year, up from its previous $194 forecast.
By sector, Deutsche Bank said its top picks remain energy — as it forecasts West Texas intermediate crude oil will approach $80 per barrel by year-end — and financials, with the 10-year Treasury yield forecast to end the year between 2% and 2.25%.
"We move other cyclical sectors (industrials, consumer) from overweight to neutral; stay neutral the secular growth group and underweight the defensives," Chadha said. "Across regions we are overweight the more cyclical EM [emerging markets], Europe and Japan versus the U.S, on a baseline of a global cyclical rebound."
S&P 500 price target updated on March 12, 2021 following a price target initiation Dec. 3, 2020
Goldman Sachs (Target: 4,300; EPS: $181): ‘Fiscal stimulus should support consumer-facing cyclicals'
Goldman Sachs raised its S&P 500 earnings outlook this month, citing an unexpected bump higher in corporate earnings results as companies rebounded faster than expected from pandemic-related disruptions.
"Analysts expected 4Q S&P 500 EPS would fall by 11%, but results showed +2% year/year growth," the strategists led by David Kostin said in a note published Feb. 12. "We raise our S&P 500 2021 EPS estimate 2% to $181 (from $178), reflecting higher sales and profit margins that should overcome input cost pressure due to high operating leverage."
Despite the improved earnings outlook for this year, Goldman Sachs left its S&P 500 price target at 4,300, implying 9.3% upside from the index's record close on Feb. 12.
Fiscal stimulus will likely comprise the next catalyst for U.S. equities, Kostin added, as lawmakers in Washington work toward another robust round of virus relief measures that would stoke consumer spending and further boost corporate profits.
"Many investors believe the spending boost will lead to higher inflation and interest rates, which would reduce the value of equity duration and increase the importance of near-term growth," Kostin said. "Fiscal stimulus should support consumer-facing cyclicals and our High Operating Leverage and Low Labor Cost baskets."
The firm highlighted a number of cyclical stocks that appeared appealing due to correlations with consumer spending and strong earnings growth over the past year, including Whirlpool, Charles Schwab, 3M and Facebook.
Updated EPS target as of Feb. 12, 2021, following a prior update on Jan. 8, 2021
This article was originally published in January 2021.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
Read more from Emily: