CITI: Here's where the stock market will be in mid-2016
On Friday, Citi's Tobias Levkovich introduced a new 12-month target for the S&P 500.
"Improving hiring intentions, wage lead indicators, the impact of oil price declines, some reflation abroad and still supportive credit conditions all suggest that equity markets should climb further in 1H16," he wrote. "The pace of monetary policy 'normalization' will need to be monitored, yet a mid-2016 S&P 500 target of 2,300 looks reasonable, though any new interest in US stocks by the general public or global investors who prefer QE-driven indices, could lead to even higher US stock levels."
That's an 8% gain from current levels, which seems pretty bullish considering the fact that the S&P 500 is up 220% from the March 2009 low.
But what about the elevated price-earnings multiple, which the market bears frequently point to?
Levkovich thinks that you can't just bank on one measure alone.
"[T]he more critical issue might be that the proof point cannot be a single chart but rather a series of data that generates a preponderance of evidence rather than an opinion built on a single data point," he said, noting that his target is based on ten inputs including consumer confidence, the VIX, earnings growth, as well as the price-earnings ratio.
But what about the prospect of tighter monetary policy via rate hikes from the Federal Reserve?
"[S]uggesting that the Fed's first rate hike will spell doomsday for equities certainly makes for attention-grabbing headlines but the history of S&P 500 reactions over the past 60 years yields a far different and more positive stock price outcome," he noted.
Indeed, history shows that stock prices tend to rise during the months leading into and months following an initial rate hike.