Credit Suisse recently upgraded their target for the S&P 500 based on improving economic conditions and the reduced likelihood of a recession. In a recent update to their equity strategy they offered 11 reasons why they believe the S&P 500 will rally to 1,400 this year:
“We recently raised our end-2012 S&P 500 target to 1,400 from 1,340 to reflect the reduced probability of a US recession (from 15% to 5%) and another European crisis needed to seal mutualisation of debt (independent from a Euro break up) – the probability of which has fallen from 7.5% to 5%. The probabilities for the core and sunshine scenarios are raised. Our central scenario continues to be 1,450 for end 2012 on the S&P 500.
1. US macro momentum has continued to surprise and the breadth of the economic recovery has been impressive.
2. Euro-area. The ECB’s three-year LTRO is a potential game changer. It’s printing money; could be exceptionally large; could drive the euro to levels required to stop the recession (c€/$ 1.10); is driving the three-year bond yield to levels consistent with temporary debt sustainability in Italy and Spain; and, critically, it is a form of debt mutualisation (as the haircuts applied to collateral are too low), yet one that is less emotive for the German public than QE or the SMP. We think there are five elements to a resolution of the Euro crisis: growth, a ring-fence for the solvent, the solvency of the insolvent, a balanced current account in the periphery and the mutualisation of debt.
3. China: a move to modest easing with inflation clearly falling. New loans rose in December and M2 growth has accelerated to 17.3% from a recent low of 12.9%.
4. Despite positive market and macro news, government bond yields have hardly moved up.
5. Food prices continue to fall: this is important as food is a third of CPI in emerging markets and 14% in the US. This helps both disposable income and control emerging market inflation.
6. Excess liquidity is very high;
7. Equities look cheap against expensive bonds – although not in absolute terms;
8. Equities remain one of the most attractively priced, long-term inflation hedges as we move towards synchronised QE;
9. The second derivative of earnings momentum is getting no worse – and we think the bulk of the rise in profitability is structural;
10. On the whole, positioning is still cautious;
11. The tactical indicators are mixed and in parts still supportive (such as risk appetite, net long position of long/short hedge funds).”
Source: Credit Suisse
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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