Citigroup, which held one of the most bearish outlooks for stocks among Wall Street firms, has raised its year-end price target for the S&P 500 to a modest loss from current levels thanks to “unbridled” support from the Federal Reserve, which the bank says will do “whatever it takes” to prevent another market crash.
Citi analysts, led by chief U.S. equity strategist Tobias Levkovich, on Tuesday raised their price target for the S&P 500 index to 3,300 from 2,900, their second upgrade in as many months.
The bank’s strategists said that their earlier bearish prediction for the stock market, which was one of the lowest on Wall Street, now appears increasingly “unlikely” as the Federal Reserve continues to aggressively ease monetary policy.
“Unbridled Fed easing, negative real [interest] rates and technical indicators show resistance breakouts” in the market, the analysts said in a note, adding that investors firmly believe that Fed Chairman Jerome Powell “has their back.”
The Federal Reserve has so far pumped trillions of dollars into the market in a bid to shore up the U.S. economy amid the coronavirus pandemic, as well as keeping short-term interest rates anchored near zero and instituting a series of lending programs.
Fed support will therefore help protect against rising market valuations and shield against any major correction in the market, Citi says, as progress on the health crisis will also be welcomed by investors.
While Levkovich and the bank’s other strategists still think the market is too richly valued, loose Fed policy will continue to act as a strong counterweight to a myriad of downside risks, such as continued pressures from the pandemic, U.S. tensions with China and a divisive 2020 presidential election.
“We still think the market may be ahead of itself but the Fed will do ‘whatever it takes’ to prevent U.S. stocks declining by teen-like percentages,” Levkovich wrote. “Is the S&P 500 ready to drop 500 points? No.”
Citi’s upgraded year-end S&P 500 price target of 3,300 still points to the downside, however, after the benchmark index closed at 3,433 on Tuesday, implying a decline of 3.9%. The new forecast is still far improved from the prior estimate, which called for a 15.5% drop in the S&P 500 from current levels. Looking ahead, Citi analysts see the S&P 500 reaching 3,600 by mid-2021, around a 5% gain from its current level.
What to watch for
Citi recommends that investors approach the market with a “combination of some risk and also defensiveness,” while also expressing skepticism about whether Big Tech stocks will continue to lead the current rally. “For some reason, we keep getting visions of Icarus getting too close to the sun and thus while we have lifted objectives to reflect these realities and the potential for even more upside, we think that ignoring some of our other indicators is not sound,” Levkovich said.
Other major firms on Wall Street have also upped their forecasts for the S&P 500 in recent months, including Goldman Sachs and RC Capital Markets, as strategists try to catch up to the market rally. The S&P 500 closed at a new record high last week, fully erasing its losses from the coronavirus pandemic. The S&P 500 has continued to set new highs this week, as stocks have enjoyed a momentous run. Earlier this year, the index tumbled more than 30% from its peak in February as the pandemic caused a market crash and sent the economy into a recession.
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