CREDIT SUISSE: NEXT STOP S&P 1,270
Credit Suisse recently upgraded their full year outlook on the back of stronger economic conditions. They no longer see risks of a second half double dip (see here) and now believe the S&P 500 will reach 1,270 by year-end. Their mid-year target is still S&P 1,220. Their upgraded outlook is based on 5 factors:
1) We still expect GDP growth to surprise positively (41/2% global GDP growth this year)
2) Corporates are under-invested (if corporate FCF normalises investment could rise by 32%)
3) Aggregate labour income looks set to surprise positively (as corporates have over-shed labour)
4) China should have a soft landing (economic overheating is limited
5) Fiscal/monetary policy is still loose and the impact of a property-price decline looks manageable).
In addition, they say equities are still attractive compared to other asset classes and most investors are caught underweight equities:
“Equities still offer value relative to other asset classes. The equity risk premium is 5%. Our long-standing target (based on ISM and credit spreads) has been 4.5% (implying a 9% return), but if credit spreads stay unchanged, the ERP could fall to 4.1%. Equities also hedge investors against the two risks that we are most concerned about longer term: inflation and sovereign credit risk.
Mis-positioning: Pension funds and insurance companies still have abnormally low equity weightings. Since March 2009, retail investors have sold $82bn of equity and bought $93bn of bonds, and have just started to buy.”
The disconnect between credit and equity has widened as the economy has improved. Credit markets are back to levels where equities were at 1,335:
“The major macro and credit variables are back to levels when the S&P 500 was last at 1,335.”
Most importantly, CS says the new bear market is unlikely to begin in 2010. They now expect the bear market to begin in mid-2011:
“We postpone our expectation for the start of a new bear market to mid-2011E from end-2010E. We still believe that the big problem is $6.5trn of excess leverage, but this becomes an issue, in our opinion, only when we get a rebound in demand for private credit. This is unlikely to occur until mid-2011E as tighter bank regulations postpone a rebound in lending.”
Source: CS
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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5 Comments
FCF is normalizing, but not towards capex. Rather, free cash flow is being spent on increases in dividends, acquisitions, and the purchase of treasury stock.
Now, with the equity risk premium being at 5%, it should ultimately increase if rates continue to stay low similar to Japan. That in theory should lower equity valuations as investors demand more compensation for the risk. Also, the 100 year historical premium is much closer to 7% than today’s 4.5%. Then again, this is argument is really for b school classes.
As for credit, it is trading at higher levels because of quantitative easing and people front running one another to take advantage of it. You can not confidently extrapolate forward equity prices based on today’s credit market due to the Fed’s massive involvement.
NEW HIGHS JUST NOW!!!!!
For anyone who hasn’t seen cattle herded live. You’re watching it. There is a near frenzy to get into the stock market now.
interesting market response to ‘blowout’ AAPL eps, et al,…so far…
That was an incredible save by the PPT. They almost let the market go negative. Buy it people. This market is going higher.
Buy high! Sell low! It’s sheeple stomping time!
Thankfully I’ll be idling by on the sidelines, only have 2 stocks to get out of still but only a few thousand in each, no biggy if there is some “random” unforeseen and unintelligent plunge for no reason what-so-ever.
Credit Suisse, the very people that couldn’t call a thing until 3 months after it happened. Yes, I will take financial advice from them! Sign me up.
Though I like to say, the market can stay irrational longer then I can stay solvent. I’m WAY up this year (not as much as last year but I was more conservative, bought in a month early mind you). They could continue to go up for a while yet and I won’t doubt it. I’m just positioning for the next drop off the cliff. If you look at the real unemployment numbers (U6) even last months “positive” job growth was a farce, U6 increased. Sure we’re not seeing massive layoffs anymore, big guys are done. Its now the mom and pop shops slowly drying up and dying, laying off < 10 people here and there.
People are spending money again, yes they are, it's what should have been their mortgage payments (about 60% of the increase is that indeed). When you can, in some cases, live 24 months payment free in your former house, why not?! If banks start to unload foreclosed homes onto the market and once the money give away is done in a few days, we should see a nice drop (with in 2 months I'd say) of home sales. Look how much they dropped when the government was giving away money.
*sigh*
Media plays whatever song they're told too, there is no more reporting on TV and very limited in newsprint. But the sheeple buy it hook, line and sinker.