Growth of US economy and market could take off as quickly as the 2nd quarter of 2021. The notion is supported by favourable tailwinds such as (i) improving global growth outlook, (ii) lagged effects of measures this year, (iii) supportive policy backdrop and potentially (iv) the mass distribution of Covid-19 vaccine among US citizens.
- Valuations of S&P 500 index are expensive relative to history - trading more than forward PE of 20.0X. But we see two major reasons why current valuation is justified in the current macro backdrop.
- Earnings of S&P 500 Index will be driven by a healthy mix of secular and cyclical growth factors in the next two years - projected to jump by more than 27% and 17% - partly due to low base effect this year.
- Our target price for S&P 500 Index by end-2022 represents an upside potential of +20% from yesterday’s closing price. The rosier growth prospect, alongside a strong line-up of positive catalysts, render the US equities an attractive bet for the year ahead.
- Thus, we upgrade our ratings for US equities to 3.0 Stars “Attractive”.
Chart 1: US equities registered positive returns of 16.5% on a 1-year basis, in a recession year.
Chart 2: US equity funds have not done shabbily either – up 9.5% on aggregate in SGD terms.
2021 Outlook: Looking past the recession year, a rosier outlook lies in the horizon
Chart 3: We expect to see a checkmark-shaped recovery in US next year
Economy: A Bumpy Recovery but Brighter Days ahead
Chart 4: Policymakers must implement more supportive measures or risk further economic scarring
Chart 5: The consumer rebound has been swift despite worsening Covid-19 crisis – providing glimmer of hope for US economic future.
Are valuations too expensive now?
Chart 6: S&P 500 equities have expanded rapidly in valuation over the last few years.
- lower rates increase the discounted present value of future cash flows
- encourage risk taking behaviour because financing costs for leveraged positions are low
- equities are more attractive to investors on a relative basis because dividend and earnings yields are much higher than fixed income yields
Chart 7: Easy monetary policies have driven up asset price inflation – especially in the S&P 500 equities.
Chart 8: Technology and tech-related sector weigh nearly one-third of the S&P 500 Index now
Earnings growth outlook are slated to improve significantly in 2021
Chart 9: Corporate earnings are projected to face a double-digit contraction this year, for first time since 2008.
Table 1: Most of S&P 500 companies are projected to deliver double-digit earnings growth next two years.
|
No. |
S&P 500 Top 10 Holdings |
Weight |
Sector |
2020 EPS% |
2021 EPS% |
2022 EPS% |
|
1 |
Apple Inc |
6.2% |
Information Technology |
21.2% |
9.3% |
7.5% |
|
2 |
Microsoft Corp |
4.8% |
Information Technology |
19.0% |
10.1% |
15.6% |
|
3 |
Amazon.com Inc |
4.7% |
Consumer Discretionary |
48.5% |
22.3% |
35.3% |
|
4 |
Alphabet Inc |
3.6% |
Communication Services |
-7.2% |
22.7% |
19.7% |
|
5 |
Facebook Inc |
2.4% |
Communication Services |
8.4% |
12.9% |
19.2% |
|
6 |
Berkshire Hathaway Inc |
1.6% |
Financials |
-10.4% |
15.4% |
11.0% |
|
7 |
Visa Inc |
1.5% |
Information Technology |
9.0% |
26.1% |
16.6% |
|
8 |
Walmart Inc |
1.2% |
Consumer Staples |
12.3% |
2.3% |
6.8% |
|
9 |
Johnson & Johnson |
1.2% |
Health Care |
-7.9% |
13.0% |
9.0% |
|
10 |
JPMorgan Chase & Co |
1.1% |
Financials |
-26.2% |
22.2% |
16.4% |
|
Source: Bloomberg Finance L.P., iFAST compilation. Data as of Dec 2020. |
||||||
Chart 10: Earnings for S&P 500 Index is likely driven by a healthy mix of secular and cyclical growth factors ahead
What could derail US equities ahead?
Despite trading at record-high level, US equities could advance by +20% in the next two years
Table 2: We think it’s likely that S&P 500 Index could close above 4,400 by end-2022
|
US S&P 500 Index |
FY2019 |
FY2020 |
FY2021 |
FY2022 |
|
PE ratio (X) |
22.3 |
24.9 |
19.5 |
16.7 |
|
Expected earnings growth (YoY %) |
0.8% |
-10.4% |
27.7% |
17.2% |
|
Earnings Per Share (EPS) |
163.8 |
146.8 |
187.5 |
220.0 |
|
Projected fair price (Based on 20.0X Fair PE ratio) |
3,276 |
2,935 |
3,750 |
4,400 |
|
Potential upside (%) |
- |
- |
- |
+20% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of Dec 2020. |
||||
Our US Strategy for 2021: 50-50 on Cyclical Rotation and Secular Growth
Table 3: Products that investors can consider for Small-Cap and Large-Cap US growth stocks
|
Sector/Product |
Active Funds |
Passive ETFs |
|
Small-Cap Growth |
||
|
Large Cap Growth |
Chart 11: We believe US equities are an attractive bet for the year ahead, despite the frothy valuations.
The Research Team is part of iFAST Financial Pte Ltd.
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