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Analyst Sets S&P 500 Target Of 3,900 For 2021: 'Healing Is Underway'

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Analyst Sets S&P 500 Target Of 3,900 For 2021: 'Healing Is Underway'

After a wild ride for the markets this yea,  the SPDR S&P 500 ETF Trust (NYSE: SPY) is on track to finish 2020 up 13.5% on the year. Given the ongoing pandemic, the stock market seems to be pricing in a lot of optimism about 2021, but Commonwealth Financial Network chief investment officer Brad McMillan said Friday that there’s plenty of room for additional upside for the S&P 500 in 2021.

In his 2021 outlook note, McMillan said there are plenty of things to both love and hate about the market going into 2021, but investors seem to be focusing on optimism given the strong rally since Election Day.

As economic conditions improve in 2021, McMillan said investors may start to face a new headwind in rising interest rates.

Related Link: Feeling Good About Your Investments? Here's Why That Could Be A Bad Sign

In addition, he said investors shouldn’t expect major upside in earnings in 2021 either. As of early November, analysts were projecting $168.22 in S&P 500 earnings in 2021, only about 3% higher than 2019’s pre-pandemic earnings of $162.97.

2022 Earnings Are Key: The good news for investors is that analysts are expecting tremendous earnings growth in 2022, and stocks will likely price in that surge throughout 2021.

At this point, analysts are projecting $195.58 in 2022 S&P 500 earnings, or about 20.3% growth from 2019 levels.

By applying a 20x multiple on those earnings, the lower end of the S&P 500’s recent valuation range, McMillan said a year-end 2021 target of 3,900 for the S&P 500 makes sense. That target represents only about 8.2% upside from current levels.

“The base case is this: the virus will be brought to heel in 2021, the economic recovery will continue and approach something like the pre-pandemic normal, and political concerns will not disrupt the economy in a significant way,” McMillan wrote.

This time last year, nobody anticipated a pandemic would decimate the global economy, but investors should appreciate how far the world has come since March, he said. 

“Healing is underway, but healing takes time. And that will be the story of 2021.” 

Benzinga’s Take: There will likely continue to be heightened volatility in the market and in revenue and earnings numbers through at least the first half of 2021 as the world fights to contain the pandemic.

From a valuation perspective, it’s understandable why 2022 projections under what should be a more normalized environment might be more important for the market next year than 2021 numbers.

 

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