JPMorgan says the S&P 500 could surge 25% in 2021 - and lists 6 sectors poised to outperform next year
- JPMorgan on Wednesday lifted its S&P 500 target for 2021 by 25% from current levels, to 4,600.
- Strategists expect that stocks that were most affected by the COVID-19 pandemic will be the biggest beneficiaries of investor inflows next year.
- Most of the market upside will take place in the first six months of the year, but the backdrop will last into the second half, JPMorgan said.
- The bank listed six sectors that it expects to outperform in 2021.
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The S&P 500 could soar as much as 25%, to 4,600, in 2021 as the outlook for equities clears after an extended period of elevated risks, JPMorgan said in a note Wednesday.
"We see the S&P 500 reaching 4,000 by early next year," strategists led by Dubravko Lakos-Bujas wrote. "Our base case S&P 500 price target for 2021 is 4,400 with a range of 4,200 to 4,600."
The bank expects that most of the market upside will take place in the first half of the year but said the backdrop should last into the second half when a fuller recovery is priced in.
The S&P 500 on Thursday traded near record highs, at about 3,670 points.
Strategists expect investors to be more selective with equities in the second half of the year as the COVID-19 recovery sweeps across portfolio positioning. They said that value stocks remained their preference and that stocks that were beaten down by the COVID-19 pandemic would be the largest beneficiaries next year.
JPMorgan listed six sectors and themes set to outperform in 2021:
Consumer discretionary
"Prior to the COVID-19 shock, consumer durables saw a significant headwind related to US / China tariffs," the note said. "If there is any easing on the trade front by the Biden Administration, this would be another source of margin expansion for the sector. This sector is our top pick for 2021."
Energy
"Given the sharp underperformance, this sector is the most under-owned and universally hated, based on our conversations with investors," the strategists wrote. "Executive action remains an area of concern for names levered to federal lands/pipelines, but political gridlock should cap broader regulatory changes."
Financials
"While revenue growth and credit concerns remain, a combination of fiscal and monetary support should sustain an easier credit environment for businesses and consumers in the short-to-medium term," JPMorgan said. "In addition, political gridlock should limit potential for corporate tax hikes and sweeping regulatory changes."
Healthcare
"Healthcare providers/services are potential beneficiaries from pent-up medical demand (e.g. deferred/elective procedures, etc.) and will have easier comps in 2021," the note said. "Despite a global slowdown in 2020, healthcare is expected to deliver another year of strong and healthy earnings growth of 7% (vs. Tech 6% and S&P 500 -15%) based on consensus estimates."
Technology/semiconductors
"We favor names that have not been primary beneficiaries of the work-from-home trend and maintain a higher conviction on more cyclical semis/tech hardware (vs. software)," the strategists said. "Semis in particular should benefit from demand recovery supported by global economic rebound, cloud/capex growth, production increases for 5G smartphones/autos and normalizing supply chain."
Bond proxies
"With further confirmation of ongoing economic recovery (eg jobs, GDP, etc.), we expect rising inflation and long-term rates to trigger further rebalancing among equity investors out of bond proxies into more cyclical industries," the note said.