(Yahoo Finance) – Stocks will likely keep rising in 2021, though the rally may come with some hitches, according to one major Wall Street firm.
RBC Capital Markets set a 2021 price target of 4,100 for the S&P 500 (^GSPC), implying additional upside of 8% from Tuesday’s closing prices. But in a best-case scenario, the index could rise to as much as 4,600 for a 21% return, the firm added. And aggregate S&P 500 earnings will likely grow 23% this year to $168 per share, according to their estimates.
Still, stocks could dip before rising further into year-end as traders take a pause after 2020’s 16% rally and the extended gains already made at the start of this year.
“While we expect 2021 will be a solid year, it comes with risk. We anticipate a period of consolidation, most likely in the first half,” the strategists led by Lori Calvasina said in a note Wednesday.
The drop could transpire as a mid-single digit decline from the index’s recent record highs, taking the S&P 500 down to about 3,600, the firm said. But it could also be an as much as mid-teens correction that pulls the index back down to approximately 3,200, it added.
“Our positioning/sentiment analysis suggests a pullback could start any time, but could also take a few more weeks/months to materialize,” Calvasina said. “Ultimately, 2021 price action will reflect 2022’s fundamentals. Longer-term risks to the market and our bullish full-year view include higher corporate taxes, Tech/Internet regulation, a less accommodative Fed, and the virus/vaccine backdrop.”
“As long as the longer-term fundamental outlook remains free of major problems, we think a pullback will provide a buying opportunity,” she added.
One of the key components RBC considered in arriving at its 4,100 price target was U.S. economic growth — and so far, the strategists’ expectations are higher-than-average. The firm anticipates real GDP will grow 5% in 2021, or slightly above consensus estimates for a 4% increase this year.
“Historically, the S&P 500 has risen about 9% in years when GDP growth has been that strong (over 4%),” the strategists said. “Interestingly, the S&P 500’s average return in years prior to a super-charged GDP growth year has been 16% — exactly what the stock market accomplished in 2020.”
Given expectations for a firming economy, RBC said it expects to see a continuation of the rotation into undervalued cyclical stocks that began in September. The firm anticipates U.S. equities will lag non-U.S. stocks, value will outperform growth and small caps will outperform large-cap stocks. RBC is Overweight the financials, materials and energy sectors, Market Weight industrials, consumer discretionary, technology, health care and utilities sectors and Underweight REITs, consumer staples and communication services.
“As is the case with our global, style, and size calls, we’d expect leadership among our overweight sectors to pause in a pullback,” the strategists added.