S&P could end 2017 as high as 2,750 or fall to 2,170, Barclays says
Analysts at Barclays set a 2,525 point year-end fair value target for the S&P 500 in anticipation of the US administration's spending plans, which they said would act as the "key" fulcrum in determining the benchmark's value.
A weighted average of three different possible fiscal policy scenarios would contribute 75 points to the S&P 500's closing level in 2017, the broker explained..
Indeed, in their worst-case scenario the S&P 500 would fall to 2,170, while in an upside scenario it could rise to 2,750 points.
The analysts attached a 20% probability to the first case and 50.0% odds to the latter, telling clients that fiscal asymmetry was tilted to the upside.
As ever, stocks were prone to a correction at some point over the course of the year due to the natural ebb and flow of data and politics, they cautioned, adding that politics in the States remained "fluid".
Nonetheless, "the S&P 500 has finished higher than March levels 90% of the time after a positive start to the year; solid fundamentals and a tax proposal point to further upside," they said.
They estimated S&P 500 components' average earnings per share would hit $129 as sales grew 5%, which combined with fatter margins and stock repurchases would boost the rate of growth in EPS to 8%.
Their year-end fair value target for the S&P 500 was based on a trailing price-to-earnings multiple of 19.0 (129 x 19 + 75=2,525).
"U.S. equity fund inflows since the election have been just $100bn, or just 33% of 2015-16 outflows; so fund flow support has further to run, though short covering is done," they added.
The most positive scenario included a 25% corporate tax rate, no border adjustment tax and a reduction in personal income taxes. That would add 300 points to their base fair value estimate of 2,450.
Should House speaker Paul Ryan's plans be passed - which included a BAT - that would shave 100 points from their fair value estimate, as stocks ran into headwinds from the US dollar and weaker economic growth. His proposals would also lower the aplicable S&P P/E multiple by 4% or 0.8 times.
However, the worst possible scenario was one with no tax plans.
"As business optimism and data reset lower, an admission of tax reform failure would lead to a ~9% decline as better long-term growth is priced out (P/E falls 1.5x) and EPS is revised lower (-$5)
"Fiscal asymmetry is still to the upside and is not fully priced. An S&P 500 upside case of +15% that does not use stretch assumptions versus a -9% downside scenario keeps us long U.S. equities. Outperformance potential of ~10% for those stocks that benefit the most from a 25% tax rate (vs. the least) also keeps us long the tax cut theme."