Oppenheimer Strategist Projects S&P 500 Will Eclipse Record High by Year End
Oppenheimer Asset Management on Tuesday projected the S&P 500 would rise above its record high by year end, the latest Wall Street firm to grow more bullish on the outlook for stocks following the market’s rally this year.
Oppenheimer lifted its year-end price target for the S&P 500 to 4,900 from the 4,400 projection it set in December, Chief Investment Strategist John Stoltzfus said in a note. The new target represents a roughly 7% increase from Monday’s closing price for the benchmark index, which has gained 19% this year.
The S&P 500 record closing high is 4,796.56, reached on Jan. 3, 2022, while the index’s intraday record is 4,818.62, which it hit on Jan. 4, 2022.
Stoltzfus said his new target stemmed from expectations that U.S. inflation will continue to trend lower, the Federal Reserve’s rate-hiking cycle appears closer to ending, and “capitulation” by stock market bears “suggests that money held on the sidelines may flow into stocks in the months ahead.”
“Our appraisal of the market landscape ... suggests that opportunity outweighs risk as current monetary policy generates a transition from a ‘free money’ environment to an environment with a traditional cost of borrowing,” Stoltzfus said in the note.
Oppenheimer’s more bullish view comes after Citigroup recently boosted its S&P 500 price target by 15%, saying the more upbeat view reflected increased probability of an economic soft landing.
Morgan Stanley strategist Michael Wilson late last month acknowledged that “our more bearish views on the broader US equity market have been wrong this year,” although the firm’s base-case June 2024 price target of 4,200 is about 8.5% below current S&P 500 levels.
“As you move through time, the realization that this is the reasonable baseline becomes more potent, and that’s what’s narrowing the gap,” Orszag said.
Among areas that could see increased activity are sectors such as healthcare, energy transition and technology. Private equity sales of the best portfolio companies and structured investments are becoming more active, too, the investors said.
One tech-focused investor, whose pipeline of deal opportunities is just about 20% of what it was two years ago, said the valuation convergence is leading to more talks. They added they expected to see a more pronounced pickup after Labor Day when people return from the summer holidays.
For banks, investors and companies, the change in sentiment, should it stick, is good news. Lower investment banking revenues dragged down profits at banks including Goldman Sachs GS.N and Morgan Stanley MS.N. Earlier this month investors latched onto any signs of hope, with comments from bank executives suggesting a recovery was afoot.
Any recovery, however, is tentative and the narrowing of the gap in expectations is not uniform across the market. Much uncertainty remains, including whether there is now too much optimism in the market.
“We’re at the very nascent stages of this,” said Jason Thomas, head of global research and investment strategy at Carlyle. “Perhaps this will fizzle out.”
For now, the market dynamic is putting some valuations back within historical norms after the wild pandemic-era gyrations, creating conditions for buyers and sellers to meet.
In the software sector, for example, firms historically traded around 6 times forward revenue. During the pandemic rally, the multiples expanded to as high as 17 times, before dropping to 5 times last year, the tech-focused investor said.
Those multiples have now traded back up above 6 times, allowing deals to happen that would not have at the end of last year, two of the investors said.
In late June, for example, IBM IBM.N bought software maker Apptio for $4.6 billion from Vista Equity Partners, paying more than 10 times forward revenue.
The idea that the economy might be in for a period of higher inflation and interest rates is also playing into the calculus.
A deal that used to cost 6.5% a year to finance at the end of 2021, now costs 11% to 12%, according to Carlyle’s Thomas. That means for a buyer to get a 20% annual return on the deal, the company’s earnings would need to grow at 16% now versus 9% in 2021.
S&P 500 earnings, excluding the energy sector, are estimated to grow 7% in the third quarter, according to Refinitiv. With the economy looking in better shape, more buyers may feel they can meet higher growth targets, Thomas said.
When they can’t agree on price, the two sides are exploring more creative ways to get along.
A company facing increased interest costs, for example, might want to replace part of its debt with other instruments that don’t require interest payments, such as warrants and payment-in-kind notes, Thomas said.
Temasek is seeing more demand for such structured investments, Atherton said, with its Credit and Hybrid Solutions unit deploying when “people aren’t yet willing to move to what we view as fair value on price, but we like the asset.”