6 Reasons S&P Will Go to 1250 - Credit Suisse

Credit Suisse sees the S&P 500 hitting 1,100 by year-end and 1,150 in 2010. Their thesis is based on 6 continuing positive trends:

1) Expected positive macro surprises.

They see housing data continuing to surprise to the upside as affordable housing lures buyers back into the market (I disagree and see the negative seasonal trends taking hold into Q1). In addition, they see China’s economy growing at 10% in 2010 which will translate into a stronger domestic economy. Lastly, Credit Suisse sees a capex boom as corporations begin to leverage up their strong balance sheets. A large result of this capex boom will be rapid hiring.

2) Better than expected earnings growth.

Credit Suisse believes earnings estimates will remain well below reality. This is a trend that has been painfully apparent in recent quarters and CS expects the trend to continue.

3) The disparity between credit indicators at pre-Lehman levels and a market that is still 20% below Lehman levels.

The analysts note that many indicators are substantially better than they were before Lehman Bros. filed for bankruptcy and panic set-in. Despite this, the market remains well below the pre-Lehman levels. Specifically, interest rates have declined from 3.73% to 3.38%, ISM has improved from 48 to 58, and corporate BAA spreads have improved by 55 bps. Despite this, the market remains well below its level of 1252 on the day Lehman filed bankruptcy.

4) Continued defensive positioning by the majority of investors.

As a percentage of total assets, equities remain near their lows. This is an unsustainable allocation as cash continues to be the most expensive asset in the world:

5) Valuations are neutral.

CS argues that stocks are now quite cheap compared to corporate bonds and treasuries. Curiously, they ignore the high PE ratio in this portion of their argument.

6) Tactical indicators are not at sell levels.

Internal tactical indicators at CS have yet to flash a sell signal. Earnings breadth is strong, economic data continues to surprise to the upside, sentiment is not overly optimistic, risk appetites remain neutral, corporations are mildly bearish on their own shares, insiders are very negative on their own shares and market breadth has recently turned negative. Despite a few negatives, CS remains constructive on the equity rally.

Comments

[Ricard:]

I would like to see their breakdown on how China can post 10% GDP growth.

Nov 04 10:35 AM

[dingding:]

I suppose they assume that China will continue to add to excess industrial capacity and unoccupied real estate.

Nov 04 10:44 AM

[Adonis:]

Interesting how they do not mention anything on unemployment or US GDP. Does CS believe that the market will go to 1150 even if unemployment goes over 10%? Also, if the S&P does go to those levels, that means the dollar will have to drop even further.

Nov 04 11:02 AM

[Tom Armistead:]

The plunge after Lehman's demise was a credit crisis, a complete loss of confidence - the Baa was the indicator and if you sold when that spiked you avoided most of the damage.

And if you bought as the Baa got back into something like a normal range you made a lot of money.

With the Baa below where it was the S&P should get back to where it was. Companies made excessive cuts in inventory and payroll, and as these are corrected the market will rise, I think Credit Suisse's targets are about as good as anyone else's.

Nov 04 11:11 AM

[Ricard:]

LOL, touche!


On Nov 04 10:44 AM dingding wrote:

> I suppose they assume that China will continue to add to excess industrial
> capacity and unoccupied real estate.

Nov 04 04:24 PM

[E Nuff Sed:]

I find points 3 and 4 quite compelling. As to PE ratio's being high - we are just emerging out of a recession. Also you have to look at PE's in light of low interest rates. Forward earning yield (e/p) is around 6.5%. 10 year bond rates are 4%. The FED model would assume stocks to be undervalued by over 50% (unlikely!). S&P 1250 in 2 years is certainly plausible. That is a 20% move from here.

Nov 06 10:46 PM