“With the economy reopening, stimulus abundant, and Fed policy uber-accommodative, it is no surprise that 2021 GDP is expected to run hotter than at any time in the past 35 years,” Credit Suisse’s Jonathan Golub wrote Tuesday, in the course of hiking his S&P target to 4,300.
As of early January, the bank’s target was 4,050. A previous upgrade took it to 4,200. The latest upward revision implies upside of nearly 11% for the benchmark.
What’s the rationale for this latest incremental optimism? Well, hot growth is expected to entail sharp revenue gains, and when you factor in high operating leverage, you end up with rosy forecasts for earnings. “Accelerating GDP should result in higher revenues and an even greater gain in EPS given operating leverage,” Golub remarked.
You’re reminded that profits for corporate America fared much better than anticipated in the fourth quarter. Indeed, for America’s largest companies, the pandemic is in the rearview, although, ironically, the psychological overhang from the shock is still constraining some management teams from providing guidance.
Credit Suisse noted Tuesday that with 90% of earnings for last quarter on the books, results exceeded estimates by 17%. Their profit outlook for 2021 and 2022 is now $185 and $210, respectively. For context, Goldman is still at $181 and $197, as far as I know.
“Rising rates—a benefit to Financials—and copper and oil prices—a boon for Industrials, Energy, and Materials—further augment [the] favorable backdrop,” Golub went on to say.
He’s not the only person to advance some version of the thesis briefly sketched above.
“Operating leverage is at the highest level in years, helping margins grow alongside revenues,” Goldman’s David Kostin said earlier this month, when the bank lifted its own profit forecasts for the S&P. “While commodity prices may continue to rise, they have historically had no consistent impact on S&P 500 profit margins… likely because some industries gain as material costs rise and others hedge exposures,” he added.
Like Goldman (and others), Credit Suisse sees some multiple compression ahead, but not enough to offset the boon from the profit recovery.
You can take the above for what it’s worth. If you’re looking for confirmation bias when it comes to a constructive take on a market that looks extended on some metrics, maybe this will help.
