"We stay overweight equities - and raise our end-2014 target on the S&P 500 to 1,960 from 1,900," said Credit Suisse's Andrew Garthwaite. "QE has meant that there are no cheap asset classes - but equities continue to look attractive in relative terms. Additionally, relative positioning, excess liquidity and a stabilisation in earnings revisions are all supportive."
1,960 implies a 9% gain from current levels.
The lengthy 211-page note includes identifies 10 positives for stocks:
- The equity risk premium has further scope to fall
- Monetary policy still supportive for equities
- Rising bond yields only become a problem at around 3.5%
- The funds flow still looks supportive
- EPS growth expectations remain reasonable
- US margins are likely to prove more resilient than many investors think
- Some risk indicators are not at extreme levels
- Credit spreads offer support for equities
- Macro surprises have rolled over, but this looks to be a mid-cycle correction
- Bull runs without a 10% correction can last much longer
"Ultimately, we believe that the equity market is set to be on an uptrend until equities become clearly expensive against bonds, QE ends or risk appetite is clearly in euphoria zone (as opposed to neutral now)," said Garthwaite. "Very near-term we see the risk of consolidation, with some of the tactical indicators extended (such as the bull/bear ratio for financial advisors, while net corporate buying is low) and we expect the Fed to start tapering in January. However, the tactical indicators are less extreme than was the case a month ago."
Garthwaite joins BMO's Brian Belski, Morgan Stanley's Adam Parker, Jefferies Sean Darby, and Goldman Sachs' David Kostin in publishing