Stocks Are Sparked for Gains in 2021

A strong earnings rebound in 2021 may allow stocks to grow into somewhat elevated valuations. We see an S&P 500 Index fair value target range of 3,850–3,900 in 2021, based on a price-to-earnings ratio of around 20 and our preliminary 2022 earnings per share estimate of $190, with potential for upside with better-than-expected vaccine progress. Read more in Outlook 2021.

Daily Insights

Stocks mostly higher. On Tuesday, US Treasury Secretary Steven Mnuchin made a surprise re-entry into stimulus discussions, boosting hopes of a stimulus deal and encouraging stocks.

• US futures are pointing higher in premarket; bonds appear lower.
• European stocks are modestly higher despite limited Brexit developments.
• Asian stocks are firmly higher amid weaker US dollar.

Strong breadth continues. One of the hallmarks of a healthy bull market is strong breadth, meaning strong participation. Recently, more than 90% of the stocks in the S&P 500 Index were above their 200-day moving average, the highest level since 2014. Historically, stocks have done quite well when there was this much breadth, as we discuss today on the LPL Research blog.

Brexit endgame approaches. After blowing through deadline after deadline, the chances of a trade deal relating to the United Kingdom’s (UK) withdrawal from the European Union (EU) are finally on a cliff-edge. If no meaningful breakthrough occurs in Wednesday’s meeting between the British prime minister and the president of the European commission, there will be a realistic chance of the UK leaving the EU without a trade deal—or a no-deal Brexit. This would be extremely disruptive on both sides of the English Channel, especially as both economies continue to recover from the effects of severe COVID-19 outbreaks.

Technical update. The S&P 500 Index, NASDAQ, and Russell 2000 Index all set record highs Tuesday, with the S&P 500 closing above 3700 for the first time. The small caps gain of 1.4% extended their Q4 outperformance over large caps to 15.5%, which would be the most in any quarter since the inception of the Russell 2000 Index in 1984.

COVID-19 news. As we enter the two-week period following the Thanksgiving holiday, early data suggests a rise in COVID-19 cases may be weaker than originally feared (source: COVID Tracking Project).

• The United States reported 213,000 new cases on Tuesday.
• New case growth in the hard-hit Midwest appears to be moderating, but the Northeast and California are accelerating.
• Arizona’s statewide intensive care unit occupancy is at 92%.

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