With a vaccine rollout under way, another stimulus package passed and a longer-lasting recovery in the economy and corporate profits on the horizon, even the least optimistic of Wall Street strategists believes stocks are going up next year.
Both known and unknown risks, however, could still derail many forecasters’ upbeat outlooks. And to be sure, no strategist this time last year anticipated the biggest driver of volatility in 2020 — the coronavirus pandemic.
Some strategists weighed these risks more heavily. Of a dozen Wall Street 2021 equity outlooks compiled by Yahoo Finance, Bank of America’s forecast came in as the least bullish of the bulls. BofA equity strategist Savita Subramanian sees the S&P 500 (^GSPC) ticking up to 3,800 by year-end 2021, for a rise of only about 2% from the index’s recent record closing high from Dec. 17.
The S&P 500 is poised to close out this year with an advance of more than 14%. And the median strategist tracked by Yahoo Finance sees the S&P 500 rising to 4,150 next year, well above Bank of America’s base case price target.
Subramanian’s argument for a more subdued advance next year hinges on her assumption that investors have already digested and priced in much of the good news around vaccines and the broader economic reopening that the inoculations will confer. And as expectations rise, so too does the opportunity for disappointment, leaving room for a downside scenario in which stocks could more than unwind their recent advances and decline next year, she said.
“The recovery is intact and the world likely re-opens in the 2H, but a lot of optimism is already priced in on vaccine/recovery,” Subramanian wrote in a recent note. “A simple move in the equity risk premium back to the prior decade average of ~500-550 bps [basis points] (vs. current 437 bps), would drop the S&P 500 down to 3,000-3,050.”
“But a few themes support stocks: the S&P 500 dividend yield is 3x the 10-year yield, and S&P 500 dividends are set to increase in 2021,” she added. “And unlike bond yields, earnings are nominal and participate in inflationary upside – where inflation risks may be running higher, given rampant money-printing and a potential post-vaccine spike in demand.”
Still, her style and sector recommendations support the overarching thesis of a broad-based economic recovery next year. Subramanian suggested value stocks over growth, cyclicals over defensives and small-cap stocks over large caps for next year.
“Value stocks are the new growth stocks,” she said. “Our top two sectors are unapologetically cyclical and value-focused: Financials and Energy.”
Both the financials and energy sectors were the biggest underperformers in the S&P 500 this year.
“Technology and Health Care offer neglect and growth at a reasonable price,” she added. “We are underweight [Consumer] Staples, Real Estate and Communication Services which represent past leadership, in our view, of bond-proxies and secular growth,” she added. “We prefer small to large amid expectations for a strong U.S. economic recovery.”
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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