S&P 500 Has Room to Run Higher, Says Raymond James Strategist

U.S. stocks ended the week low, erasing previous gains amid investors’ pessimism as some states saw a second wave of COVID-19 infections. The Dow Jones Industrial Average gained 1.0%, the S&P 500 increased 1.9%, and the NASDAQ jumped 3.7% last week.

Although economic data remained mixed, showing that the recession brought in by the COVID-19 pandemic may be sharp, but will not sustain for long. However, markets recovered to a bullish stance again this week after the Federal Reserve announced stimulus for corporate bonds, leading to tighter spreads, which lent a helping hand to riskier assets.

“On the positive note, we got further confirmation from the Fed that it will remain supportive. Potential COVID-19 treatments, improvement in economic data, and further fiscal stimulus could push the market closer to our upside case scenario of 3,384,” wrote Michael Gibbs, director of equity portfolio and technical strategy at Raymond James.

“We use 3,111 as our base case S&P 500 price target for 2020. With the S&P 500 currently trading in line with this target, we would look to accumulate favored sectors during market volatility. Moreover, the market will need to pass the baton from valuation expansion to re-acceleration of economic and earnings expansion. We believe this could cause some periods of volatility as this transition takes place and would use any dislocation to add to positions.”

Raymond James in its weekly market guide noted that earning per share growth has seen stabilization as earnings season approaches. While it is largely expected to be a very challenging quarter, it is also expected to be the trough in earnings for this recessionary period. S&P 500 earnings are expected to drop 43.2% year-on-year.

While this continues to point to the severity of the economic situation, the recent stability, not just for the second quarter of this year, but also for the third and the fourth quarters, points to some expectation that the worst is likely behind us. However, the worst-case scenario may be averted.

The sectors that have seen the largest earnings revisions since the end of 2019 have been the more cyclical sectors such as Energy, Consumer Discretionary, Industrials, and Financials, Raymond James strategist added.

For a look at all of today’s economic events, check out our economic calendar.