Credit Suisse upped its S&P 500/FTSE 100 year-end target to 1,640/7,000 from 1,550/6,600.
It said: "We keep our 4% overweight of equities, but raise our year-end S&P 500 target from 1,550 to 1,640 (and our FTSE 100 target from 6,600 to 7,000).
Valuation: "Our model suggests a warranted equity risk premium should now be 4.7% (down from 5.4%) - against an actual equity risk premium of 6%.
The tail risks have diminished further: "The private sector in the US looks strong enough to withstand fiscal tightening of around 2.5% of GDP this year. The possibility of OMT activation has allowed Spanish 3-year note yields to fall to 2.5%. Japanese policymakers finally look determined to end deflation (via the BoJ activism and fiscal policy). Commodity prices (oil, food, copper) remain well-behaved, unlike in previous years. Global GDP growth (YoY) is set to pick up for the first time in 11 quarters."
More aggressive central banks: "Since December, central bank balance sheets have declined by the largest amount since 2009. This is set to reverse. We think the BoJ and BoE will become more aggressive (the ECB's balance sheet has contracted by 14% from peak). Central bank balance sheet expansion is likely to lead to rising inflation expectations and rising excess liquidity; both typically lead to a re-rating of equities. The ideal time for equities is rising inflation expectations without the actuality of rising inflation - an environment we believe persists until 2015."
A funds flow squeeze: "Since the market trough in March 2009, markets have doubled despite $120bn of net outflows from global equity funds. We see a potential funds flow squeeze from both retail and institutional buying (inflows so far have been just a quarter of post-08 outflows) and strong corporate buying (up to $1.8tn). Long-term positioning is misaligned to both valuation and inflation risks.
"The tactical indicators are less worrisome than they were (equity sector risk appetite is only neutral) - and earnings revisions are improving.
"US margins are set to stay flat until rates rise or labour has pricing power (neither is likely before H2 2014).
"The main concern for our structural overweight in equities is US GDP growth breaking out of the 'goldilocks' zone of 1.5% to 2.5% (growth below 1.5% implies negative EPS growth and would raise deflation worries, while growth above 2.5% is likely to raise worries about the end of ZIRP) or China raising rates. In the near-term, there is a risk of slowing ISM, which could lead to some consolidation in equity markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
