The Standard & Poor’s 500 Index will surge to 1,300 through the end of next year because of investor sentiment, stock valuations and depressed earnings estimates, Citigroup said.
The gauge will rise 15 percent from its closing level of 1,125.59 last week, and end 2010 at 1,175, Tobias Levkovich, the firm’s chief U.S. equity strategist, said in a Sept. 17 note.
“It appears that 2011 should provide solid gains for equity investors,” Levkovich said. “Stock-market investors could enjoy an aggregate total return of roughly 20 percent in the next 15 months or so.”
Citigroup’s investor-sentiment model shows a 97 percent chance that stock prices will be higher in a year. The current price-to-earnings ratio signals an 85 percent chance of a rise over the same period, the report said. The S&P 500’s P/E ratio is 14.8 using the past year of earnings. Also, “the market is implying declines in future earnings, which historically has generated highly respectable 20 percent-plus strength.”
S&P 500 companies will post 36 percent profit growth in 2010, the fastest increase since 1988, and a 15 percent rise in 2011, according to the average analyst earnings estimate in a Bloomberg survey.
Smaller stocks may outperform big ones, Levkovich added, citing a higher probability that companies with lower market capitalizations would be taken over.
Risks to the 1,300 estimate include “policy errors and growing debt burdens,” Levkovich said, citing concern about government debt levels and possible changes to tax policy. He cited the Office of Management and Budget’s projection that net federal government debt to gross domestic product would reach 75 percent by 2017, and noted that “tax policy will have to be addressed given the expiring Bush tax cuts.”