S&P 500 Index: Earnings optimism set to constrain the upside – CE

It is tempting to think there is still significant upside for the S&P 500, given the recent slew of upbeat earnings reports for Q1. Nonetheless, a lot of good news about the outlook for profits is now discounted, even allowing for the effects of the pandemic. And there are clearly risks to the outlook, such as the president’s plan to raise corporate taxes and a potential antitrust drive, strategists at Capital Economics report.

S&P 500 unable to knock down the 4200 barrier

“Just because analysts appear to have underestimated the scale of the rebound in earnings in Q1 doesn’t mean that they are being too conservative about the future. On the contrary, they seem to be very optimistic even allowing for the fact that the US economy is likely to fare especially well during the rest of this year and next.”

“The implication is that EPS will have to perform even better than analysts are forecasting in general between now and the end of 2022 if the S&P 500 is to get a boost from this source. We think that is unlikely, despite our positive view of the US economy.”

“Even if analysts stop revising up their forecasts for EPS, the S&P 500 could still get a boost if its valuation continues to climb. But the price investors are willing to pay for earnings is already at a lofty level. And we doubt that it will continue to soar given our expectation that there will be a renewed rise in long-dated TIPS yields and sense that there is limited scope for an offsetting drop in credit spreads.”

“The S&P 500 will barely make any more headway in 2021 – our end -year forecast is 4,200 – and eke out only small gains in 2022 and 2023.”