After closing for the first time above the 2,000 mark on Tuesday, a BMO Private Bank report predicts the S&P 500 is poised to hit 2,140 within the next year.
“Over the next 12 months, we anticipate a 5% to 7% gain for the S&P 500, fuelled by modest earnings and revenue growth,” says chief investment officer Jack Ablin. “Our favourite sectors are financials and healthcare, because of their relatively cheap valuation when gauged against the other sector groups.”
The S&P first reached 1,000 in February 1998. The market crossed the 1,000 mark four more times since then, two times on the upside, August of 2003 and August of 2009; and twice on the downside, July of 2002 and November of 2008.
Since hitting a low in March 2009 in a month the U.S. economy lost more than 800,000 jobs, the S&P has grown nearly 200%, for a 22% annual compounded return.
While Federal Reserve restraint represents a potential headwind, he notes that history has shown that equities can advance as rates rise, particularly in response to stronger economic growth and modest inflation.
“Equities are cheap compared to bonds,” Ablin explains. “The S&P’s earnings yield is more than two percentage points above the triple B bond rate. Large caps are also cheap versus their smaller counterparts, like the Russell 2000.”
According to the report, risks to the rally continuing are an extended economic growth slowdown abroad, both in China and the EU. A substantial rise in unanticipated inflation could also shift investors’ attention away from equities toward real assets, such as gold and other commodities.
Longer term, the trajectory of the S&P largely depends on the direction of the U.S. and global economy.
“While we’re optimistic, certain imbalances, like debt levels, household income growth and labour participation, need to be addressed by both the public and private sectors,” he says.
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