S&P 500: The Path To 3,430

A blowout May jobs report has the S&P 500 once again knocking on the door of 3,200 on Friday.

In mid-April, DataTrek Research co-founder Nicholas Colas laid out a path to get back to S&P 3,200. On Thursday, Colas updated his outlook and explained why the new target for investors to watch is 3,430.

Colas’ new 3,430 target represented 10% upside to Thursday’s closing price, but is only1.9% above the S&P 500’s all-time high from back in February. He said 10% upside from recent levels plus the 1.9% S&P 500 dividend yield is roughly in-line with the index’s trailing 10-year compounded annual return of 13%.

Sectors To Watch

On a sector-by-sector basis, Colas said investors shouldn’t expect too much additional upside out of tech stocks given the sector already trades in-line with its earnings multiple during the February highs.

“Betting on multiple expansion in this already-pricey group cannot be the lynchpin of any near-term investment case,” he wrote.

Likewise, the health care sector currently has a 15% weighting in the S&P 500, which is well above its 10-year average of 13.9%. That weighting suggests near-term upside in the health care sector could be limited as well.

Instead, Colas said investors should look to the financial sector to potentially lead the way to 3,430 given their current 11% weighting is well below their 14% long-term average.

“Financials also have the lowest multiple of any S&P sector (15.1x), and still trade 21% below their February highs,” Colas said.

In addition, the industrial sector is relatively pricey at 25 times earnings, but has notable potential recovery plays in stocks like Union Pacific Corporation UNP and Honeywell International Inc. HON. In addition, heavy consumer discretionary hitters like McDonald's Corp MCD and Nike Inc NKE have not yet broken out to new highs.

Benzinga’s Take

Friday’s jobs report suggests the U.S. economy may have turned a corner in the COVID-19 downturn, and it may only be a matter of time before the SPDR S&P 500 ETF Trust SPY is back at new all-time highs. If Colas is correct, the Financial Select Sector SPDR Fund XLF could lead the charge in the coming months.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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