DAVID BIANCO: The S&P 500 Will Make A 'Straigtht Shot' To 1,800
Deutsche Bank's David Bianco is among the strategists to have cranked up his S&P 500 target this month.
But in a note to clients titled "Straight Shot To 1800," Bianco argues that the rally will be a smooth ride for stock market investors.
"We expect the S&P to reach 1800 without a 5%+ dip," he wrote in a 52-page note on Thursday. Here's more color:
S&P 500 targets for 2013, 2014 and 2015 yearends: 1750, 1850 and 2000. We expect the S&P to reach 1800 without a 5%+ dip
Since May, we advised watching for signs of a return to healthy S&P sales and EPS growth, after four shy quarters, in order to get more bullish. We argued that restoring healthy S&P sales and EPS growth required oil price resilience and stronger manufacturing, investment spending and exports. Oil and the euro have been very resilient, despite higher yields and dollar gains upon normalizing monetary policy. Moreover, macro reports for 3Q to date have consistently indicated a definitive acceleration in capex and trade vs. last 4 qts. For these reasons, we raised our S&P EPS estimates and yearend target on Sept. 3rd. to 1750 from 1675. Confirmation of these trends and ultimately stronger sales and EPS growth in 3Q and 4Q reports should push the S&P to 1800 by early next year.
Healthy mid single-digit sales growth and upper single-digit EPS growth is now imminent. S&P EPS: 2013E $111, 2014E $119
We are now confident that US investment and exports will accelerate to 5% or higher in 2H13 and 2014 on: 1) resilient oil prices, which will keep energy capex rising, 2) a well managed China slowdown, that is curbing construction but supporting investment in capital goods used for transportation or that lift urban living standards or that boost labor productivity, and 3) an overdue upgrade cycle in US manufacturing, enterprise technology and infrastructure. These factors should make for decent industrial capital goods demand despite US defense spending pressures and the global mining capex crunch. But in order for overall US capex and exports to return to the normal ~10% growth rate of the past 20 years outside of recessions Tech spending must be reinvigorated. Fortunately, some of the latest indicators and management commentary suggest that corporate tech spending is starting to stir.
A return to normal EPS growth supports a return to a normal PE. Target PE: ~16x trailing and ~15x forward S&P EPS
Our 2014E EPS of $119, up over 7%, assumes ~4.5% sales growth, ~1.5% of mostly pension related margin expansion and a ~1% share count decline. We forecast nearly 8% EPS growth at non-financials after two years of no sequential quarterly growth. Our outlook represents a broad return to healthy growth, across sectors, not dependent on Financials. We also expect 2014 to be another year of ~15% DPS growth. With a return to nominal and especially real EPS growth that is in line with history, we consider the historically normal PE of 16x trailing and 15x forward S&P EPS fair. This PE aligns with the average since 1960 and implies that 6% is a fair real return on long-term S&P 500 ownership. Further PE expansion in 2014 or 2015 would be justified if long-term real interest rates stay below historical norms when the Fed stops asset purchases or if real EPS growth plus the dividend yield outlook can exceed historical averages. Mid-term elections and the implications for corporate taxes will also influence the 2014 end PE.
The S&P 500 closed at 1,709 on Friday.