- Despite a near 5% correction from its record highs, the S&P 500 has not yet hit its peak in 2021, DataTrek said in a Wednesday note.
- "There's simply too large a gap between S&P earnings expectations and what Q2 actually delivered to get too bearish here," DataTrek said.
- These are the three reasons why the S&P 500 still has room to hit record highs by year-end.
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Monday's Evergrande-induced stock market sell-off helped spur a near 5% decline in the S&P 500 from its record high reached in early September.
The heightened uncertainty has led many Wall Street strategists to lean more bearish into the current drawdown, with Morgan Stanley's Mike Wilson calling for a near 20% sell-off to about 4,000 on the S&P 500 by year-end.
But others are unfazed by the potential insolvency of Evergrande and are reaffirming their bullishness, including DataTrek Research co-founder Nicholas Colas.
"There's simply too large a gap between S&P earnings expectations and what Q2 actually delivered to get too bearish here," Colas said in a Wednesday note, adding,"there should be something left in US large caps over the remainder of the year – enough to see a new high."
These are the three reasons why the S&P 500 still has room to hit record highs by year-end, according to DataTrek.
1. "The Federal Reserve is still clearly in the stock market's corner."
"[The Fed] is tiptoeing its way into bond purchase tapering. A rate increase in 2022 carries only coin-toss odds in Fed Funds Futures markets. More than anything, the Fed sees its mission as returning the US economy and particularly its labor market to a pre-pandemic state as quickly as possible. It's not worried about inflation because, with 10-year Treasuries at 1.33 percent, the market is not worried about inflation. Oh, and it is abundantly clear that Chair Powell would like to be renominated, so the odds of a policy misstep that tanks equity markets now through year end are very low indeed," Colas said.
2. "The S&P 500 is the highest quality broad stock market index anywhere in the world."
"Lump together Apple, Microsoft, Amazon, Google, Facebook, Tesla and NVIDIA and that's over a quarter (26%) of the index. All industry leaders in industries with great long term growth prospects. MSCI EAFE's top holdings include just 2 tech companies (ASML, SAP) with a combined 2.9% weight. MSCI Emerging Markets is still overweight Chinese tech, which is going nowhere fast. Bottom line: whether the US/global economy grows a lot or just a little in 2021, US large caps will remain a go-to destination for marginal capital," Colas said.
3. "There's still an ample cushion of safety in terms of US corporate earnings expectations."
"Remember that the S&P 500 printed an actual Q2 earnings result of $53/share in Q2. Wall Street analysts don't expect earnings to see that level again until Q2 2022 and have $49/share in their models for the upcoming Q3 earnings season. Would corporate America be in such a rush to hire (and it clearly is) if C-suites were expecting an 8 percent decline in sequential earnings? No, they certainly would not. Which, of course implies that Q3 will be a very strong quarter and that 2022 estimate we mentioned above is certainly beatable," Colas said.