Introducing the Year-End 2011 S&P 500 Target

- Another year of gains but it is likely to be uneven. "After calibrating several methods to arrive at probable stock market levels, it appears that 2011 should provide solid gains for equity investors with a newly established year-end S&P 500 target of 1,300, which argues for further 10% appreciation off of the 2010 yearend objective of 1,175. Overall, our analysis contends that stock market investors could enjoy an aggregate total return of roughly 20% in the next 15 months or so."
- Sentiment readings strongly support impressive upside opportunity. "The unique Panic/Euphoria Model remains mired in panic territory yielding a 97% chance that stock prices are higher in a year’s time. Moreover, the average gain over the past 20 years when this tracker was registering panic readings has been better than 17%. Continued and consistent equity mutual fund outflows only further emphasizes the disdain for the asset class, bolstering the case that investors may find a need to chase returns, providing added impetus for higher stock indices."
- Valuation models sustain the bullish case. "The P/E Bulls-Eye approach has shifted with the sweet spot having moved to less than 8x trailing EPS, but the current 14-16x P/E range still augurs well for share prices given an 85% probability of gains in the subsequent 12 months with an average near 14% move. Furthermore, our most highly correlated valuation metric suggests that share prices could be as much as 30% under-valued. Thus, the projected index level could prove conservative."
- Earnings expectations are depressed with investors having no conviction in estimates. "Despite consensus bottom-up estimates calling for almost 16% EPS growth next year and buy-side surveys showing only 9% forecasts, the market is implying declines in future earnings which historically has generated highly respectable 20%+ strength. While margins challenges in the middle of next year could argue for a repeat of 2010’s summer weakness, equities should provide very adequate returns for informed and nimble investors who understand the implications of a trading environment."
- Risks to the outlook include policy errors and growing debt burdens. "Government policy decisions could have enormous influence on the 2011 market direction as deficit financing requires a responsible path given possible contagion effects from debt-laden countries. In addition, labor woes in most developed economies could drive increased trade friction as politicians scramble to placate dissatisfied voters. Debt rollover is a particularly onerous difficulty as was seen for the REITs two years ago and the average duration of government debt may need lengthening, but bond market vigilantes may not be all that tolerant if reasonable and credible longterm deficit reduction plans are not instituted."


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