The S&P 500 has 7% upside into year-end as risk-on sentiment gains steam, Fundstrat says

• Fundstrat's stock market outlook suggests there's plenty of upside left into year-end as risk-on sentiment grows.
• Fundstrat raised its S&P 500 price target for the third time this year to 4,800, representing 7% upside potential.
• "The improvement in market technicals is actually suggesting that underlying trends are getting stronger," Fundstrat said.
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Fundstrat thinks there's even more upside ahead for the stock market in 2021 as risk-on sentiment increases among investors, according to a Wednesday note.

The firm raised its year-end S&P 500 price target for the third time this year to 4,800, representing potential upside of about 7%. Fundstrat initially entered 2021 with a 4,300 price target for the S&P 500, then raised the target to 4,600 in June, and again raised the target to 4,700 in July.

"The improvement in market technicals, such as clearing the 50-day moving average, is actually suggesting that underlying trends are getting stronger," Lee said.

The firm believes that a near-record rally in bitcoin is suggesting an increase in risk-on sentiment among investors, which is a marked change from September when investor sentiment was mostly bearish. Current sentiment indicators show that there is plenty of room for investors to get more bullish as headwinds linked to rising inflation and suppl-chain disruptions begin to dissipate.

In addition, COVID-19 cases are tracking better than consensus, the economy remains extremely resilient, and positive seasonals are set to begin at the end of October. So the S&P 500 is likely to follow prior trading patterns it cemented in 2021: a roughly 30-day period of consolidation before a 7% rally higher, according to Fundstrat.

The firm noted that the S&P 500 consolidated for 43 days in February and March before surging 7%, then consolidated for 32 days in May and June before jumping 7%, and consolidated for 32 days in September and October before beginning to rally. Lee is betting that another 7% surge is due for stocks following this period of consolidation.

If the S&P 500 does get to Fundstrat's year-end target of 4,800, valuations would not be cheap, but rather appropriate given the low interest rate environment, according to the note. A forward P/E multiple of 21.9x, based on Fundstrat's S&P 500 EPS estimate of $219 for next year, would still be cheaper than high-yield bonds, according to Lee.

"S&P 500 4,800 is achievable and not necessarily causing anyone to make 'stretch assumptions,'" Lee concluded.