The S&P 500 will climb another 6% in 2020 as fundamentals recover ahead of expectations, JPMorgan says

by
https://cdn.businessinsider.nl/wp-content/uploads/2020/09/5f5fb43a99963.jpg
FILE PHOTO: Traders gather at the post that trades IBM on the floor of the New York Stock Exchange
Thomson Reuters

Profit outlooks are improving faster than Wall Street anticipated, and JPMorgan sees the trend driving the S&P 500 to a record before the year is out.

Strategists led by Dubravko Lakos-Bujas reiterated their 2020 target of 3,600 for the index, implying a 6% jump from current levels. The S&P 500’s earnings recovery is “ahead of expectation” due to policy support from the Federal Reserve, reopenings around the world, and long-term tech plays, the team wrote in a Friday note.

The latter is particularly important to the index’s rebound. Though tech stocks are hot off a multi-day decline, the companies are still showing relative insulation from the coronavirus’ economic impact. Tech profits in the second quarter “helped offset broader earnings weakness,” the bank said, and that trend is likely to continue while other firms play catch-up.

“As for COVID-19 sensitive companies,  2Q likely marked the bottom with earnings to see a sustained recovery as the economy rebounds, and consumer and corporate behavior gradually normalize,” the strategists wrote.

Read more: A Wall Street expert breaks down why these 3 smaller retailers are poised for gains amid a down economy — and are the best alternatives to behemoths like Costco and Target

The recent pullback in stock prices is “healthy” and was mostly fueled by technicals including momentum gauges and systematic selling, the team added.

The recovery from second-quarter lockdowns is also driving a faster-than-usual rebound in various market indicators, according to the bank. JPMorgan’s US Quant Macro Index — a composite of growth, sentiment, liquidity, and inflation gauges — is in the middle of a sharp V-shaped bounce. The US manufacturing industry, while “not booming” has stabilized in a steady growth phase.

Leading indicators, including freight car loadings and private housing permits, continue to trend higher and hint at economic gains to come, the team added.

The strengthening gauges should give way to similarly robust profit growth. JPMorgan expects S&P 500 firms’ margins to completely recover from the virus’ hit by the second half of 2021 as demand rebounds and interest costs fall. The index’s earnings-per-share will hit $136 by the end of the year and $170 in 2021, the team said, beating the respective consensus estimates of $130.19 and $166.39.

The upcoming US presidential election presents the biggest risk to the firm’s forecast. Each potential presidency comes with new policy uncertainties that could drag on investor sentiments. The lack of another stimulus bill to bridge the coronavirus slump could also stifle a market rally, the strategists said.

The S&P 500 sat at 3,393.92 as of 12:50 p.m. ET, up 5% year-to-date.

Now read more markets coverage from Markets Insider and Business Insider:

Oil demand may never rebound to pre-pandemic highs as world shifts to renewables, BP says

Oracle leaps 8% after reportedly winning partnership bid for TikTok’s US operations

Paul Lambert returned 45% to investors in 2019 and is crushing the market again this year. The solo fund manager lays out his strategy for finding winning stocks — and shares 5 of his top picks today.

Read the original article on Business Insider