Strategists see more stock market gains through the end of the year

The first month of the new year has not even ended yet, and Wall Street firms are already building a case for stocks to rise even further this year.

With the composition of the government now confirmed and Democratic lawmakers in control of both the U.S. House of Representatives and Senate, strategists are preparing to see more fiscal stimulus boost consumer spending, the economy and corporate profits in the coming months. This is set to lay the groundwork for a strong recovery once the vaccine rollout reaches much of the population, many have said.

Still, these risk-on catalysts will likely come alongside some opposing forces, including rising interest rates and the specter of a less accommodative Federal Reserve and higher corporate taxes as the economy emerges from the pandemic.

But on net, with all these factors in mind, a number of strategists suggested stocks will rise even more strongly this year than they believed at the end of 2020.

Here’s what some Wall Street strategists are now expecting for the U.S. stock market this year.

RBC Capital Markets (Target: 4,100; EPS: $168): ‘While we expect 2021 will be a solid year, it comes with risk’

RBC Capital Markets released its initial year-end outlook for U.S. equities on Jan. 20. In this, RBC said it expected the S&P 500 would ultimately end the year at 4,100, implying upside of 9% from closing prices on Jan. 19. One of the key drivers of the rise will come amid the expected economic reopening, with RBC estimating real gross domestic product will grow 5% in 2021.

Before ending the year higher, however, stocks are likely to endure a pullback as traders take a pause after 2020’s 16% rally and extended gains so far this year.

“While we expect 2021 will be a solid year, it comes with risk. We anticipate a period of consolidation, most likely in the first half,” the strategists led by Lori Calvasina said in a note.

The drop could come as a mid-single digit decline from the index’s recent record highs, taking the S&P 500 down to about 3,600, the firm said. But it could also be an as much as mid-teens correction that pulls the index back down to approximately 3,200, it added.

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“Our positioning/sentiment analysis suggests a pullback could start any time, but could also take a few more weeks/months to materialize,” Calvasina said. “Ultimately, 2021 price action will reflect 2022’s fundamentals. Longer-term risks to the market and our bullish full-year view include higher corporate taxes, Tech/Internet regulation, a less accommodative Fed, and the virus/vaccine backdrop.”

S&P 500 price target initiated Jan. 20, 2021

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Goldman Sachs (Target: 4,300; EPS: $178): ‘More fiscal stimulus and faster growth lead to higher 2021 S&P 500 EPS’

Goldman Sachs raised its S&P 500 earnings outlook this month, citing the additional economic boost likely to emerge as Democratic control of Washington leads to increased fiscal stimulus. For the full-year, the firm now expects full-year GDP growth to come in at 6.4% in 2021 and 4.0% in 2022, up from their previous expectations for growth of 5.9% and 3.7%, respectively.

“Elections have consequences. Democratic control of Washington, D.C. after January 20 will bring greater fiscal spending, faster GDP growth, more inflation, and higher interest rates than we had previously assumed,” the strategists led by David Kostin said in a note.

The firm raised its 2021 S&P 500 earnings per share growth outlook by 2 percentage points to 31%, or to $178. However, it also trimmed its expected 2022 EPS growth rate by 2 percentage points to 10%, or to $196, to account for a likely increase in the corporate tax rate under a unified Democratic government.

Despite the improved earnings outlook for this year, Goldman Sachs left its S&P 500 price target at 4,300, implying 13% upside from closing prices on Jan. 19.

“The benefit of slightly higher EPS is offset by modestly higher bond yields, which will limit absolute [price-to-earning] multiple expansion at 22x,” Kostin said.

Updated EPS target as of Jan. 8, 2021

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Credit Suisse (Target: 4,200; EPS: $175): ‘The likely avalanche of pent-up consumer demand cannot be ignored’

Credit Suisse raised both its S&P 500 price and earnings per share targets for 2021 this month, also in anticipation of additional fiscal stimulus. The firm raised its price target on the S&P 500 to 4,200, up from the 4,050 it saw at the end of last year, with the revised outlook representing about 10.6% upside from closing prices on Jan. 19. Credit Suisse now sees S&P 500 aggregate earnings per share growing by 25% over last year to $175 in 2021, up from the $168 seen previously.

“Democrats picked up both Georgia Senate seats, paving the way for Biden to implement his agenda more broadly,” Credit Suisse strategist Jonathan Golub said in a note. “This should result in additional stimulus, including the expansion of payments to individuals.”

“While the timeline for vaccination rollouts has proven underwhelming, the likely avalanche of pent-up consumer demand cannot be ignored,” he added. “Any additional stimulus will further fan these flames.”

Unlike some other strategists, however, Golub said he does not “anticipate more progressive policies on taxes or regulatory issues that might disrupt technology, health care, financials, energy or the market more broadly” despite the Democratic control of each of the White House, Senate and House of Representatives.

Given the assumptions for more stimulus, Credit Suisse upgraded pro-cyclicals including the consumer discretionary sector – excluding internet retailers – industrials, materials and energy to Overweight. The firm also downgraded the major sector outperformers of 2020 including information technology, communications and internet retail to Market Weight. Financials and health care companies remained the firm’s highest conviction Overweight calls.

Updated S&P 500 price target as of Jan. 7, 2021

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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