Market Strategy Radar Screen Weekly July 31, 2017

 Don’t Stop Believing

Improved economics and rising earnings lead us to raise our price target on the S&P 500.

We are revising our year-end price target for the S&P 500 higher. The index first passed through and closed above our original 2017 target price of $2450 on June 19, considerably earlier than we had expected. We had initiated the $2450 price target on December 19, 2016. It’s worth noting that at that time it was the second highest on the Street. The target which was above ours last December has yet to be attained but is no longer the highest based on others revised since the start of the year.

After crossing and closing just above our target (at 2453 on June 19) the S&P 500 lost some ground on the back of a spate of weak economic data in the few weeks that followed.

Growth concerns and uncertainty surrounding if and when the Fed would raise its benchmark rate again this year along with valuation concerns forced the Bull to take a detour.

From June 20th until July 6th the market struggled to return to $2450 until a brace of positive economic data (and overall better than expected results since the start of Q2 earnings season) helped restore confidence in the bullish camp.

The index has since crossed and closed above 2450 a second time two weeks ago (on July 14) when it closed at a level of 2459.14.

Since then the benchmark’s price has trended higher reaching a new high just last Wednesday when it closed at 2,477.83.

As of last Friday’s close the S&P 500 stood at 2472.10 just slightly below its latest record high for this year and just under 1% above our 2450 target.

With improved earnings growth in the last two quarters of 2016, in the first quarter of 2017 and evidence thus far of continued earnings strength in Q2 along with prospects for further improvement in the third quarter, we raise our calendar year 2017 EPS estimate for the S&P 500 from $125 to $129.

With the US economy growing at a 2-2.5% annualized rate that appears sustainable at this time (even without any added stimulus from the administration’s agenda) and with developed and emerging market economies outside the US showing recurring evidence of economic recoveries taking place around the world, corporate revenues and earnings could rise further warrant higher prices for stocks.

So far modest inflation stateside and abroad is giving central bankers time to adjust their monetary policy from highly accommodative to a normalized regime. If this continues the effects of normalization may not be as disruptive to the bond market and the stock market as many have expected.

In our opinion the weaker dollar since the start of the year is attributable more to expectations that the Fed will not be raising rates at a pace as quick as some had expected, and not a reflection of loss of confidence by the currency markets in the ability of the administration to execute its stimulus agenda.

A modestly weaker dollar can help to improve the competitiveness of S&P 500 US multinational companies doing business across the globe. This could well serve earnings seasons in the quarters ahead.

On our expectations for further economic and earnings improvements in the months that remain this year we place a P/E multiple of 20.5 times our 2017 EPS estimate of $129, arriving at our new price target for the S&P 500 of $2650, which is 7.2% above Friday’s close of 2472.10, and 8.2% higher than our original target of $2450.

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