The S&P 500 will rally 12% through 2021 as investors position for a virus-free economy, Credit Suisse says

Credit Suisse
  • The key to investing in 2021 is preparing for a virus-free economy in 2022, Credit Suisse strategists said Wednesday.
  • In a note to clients, the team led by Jonathan Golub initiated a 2021 S&P 500 price target of 4,050, implying a 12% rally from Tuesday’s closing level.
  • Various coronavirus vaccines vying for regulatory authorization led the bank to “de-emphasize the near-term” and focus on how the US economy would launch out of its virus slump, the team said.
  • “The virus will be a fading memory” in 2022, the team said, and the rotation to cyclical stocks will be “largely behind us.”
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With several coronavirus vaccines vying for regulatory approval, Credit Suisse says the key to investing in 2021 is positioning for “a more normal world” in 2022.

Strategists led by Jonathan Golub on Wednesday initiated a 2021 S&P 500 price target of 4,050, implying a 12% rally from Tuesday’s closing level. They predicted that earnings per share would grow by 20% in 2021 and another 13% the following year as the US economy fully reopens and revenues rebound to pre-pandemic levels.

Investing in 2021 will be an “art of predicting the future in the future,” the team said in a note to clients. If approved, vaccines from Moderna and the team of Pfizer and BioNTech are expected to be available early next year, with the most vulnerable populations receiving the first doses. Forecasts of widespread containment of COVID-19 in 2021 forced the bank to “de-emphasize the near-term” and shift its focus to what a virus-free economy would look like, the strategists said.

“As we look toward 2022, the virus will be a fading memory, the economy robust, but decelerating, the yield curve steeper and volatility lower, and the rotation into cyclical largely behind us,” the strategists said.

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Current risks to the team’s outlook are relevant but “likely to fade,” they added. The US reported 155,835 new COVID-19 cases on Tuesday, bringing the nation’s total cases above 11.2 million. Several cities have already reinstated lockdown measures to curb the virus’ spread, and such restrictions could cut into the critical holiday season. A stimulus package could help offset the economic restrictions, but it remains “politically unattainable,” Credit Suisse said.

Investor optimism is also already “extremely extended,” making any holdup in vaccine production and distribution a major risk to stocks’ lofty levels. Still, vaccines for frontline workers and older Americans would accelerate the return to normal, the team said.

Credit Suisse recommended investors hold overweight stakes in tech stocks and financials through the recovery. Faster sales growth and superior margins set the former group up to outperform, while improving credit conditions and a steepening yield curve would bolster bank stocks.

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Cyclical stocks will perform well in the near term as investors shift out of defensive bets, the strategists said. But the largest gains for the economy have already played out, and momentum is likely to moderate through next year, they wrote.

Non-cyclical stocks are set to lag behind as the economy rebounds, and rising rates would cut into any dividend-yield appeal, they added. The healthcare sector presents the single exception, as “a more robust earnings trend” would fuel outperformance, according to the bank.

The S&P 500 closed at 3,609.53 on Tuesday, up roughly 12% year-to-date.

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