The S&P 500 will rally 12% through 2021 as investors position for a virus-free economy, Credit Suisse says

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  • The key to investing in 2021 is preparing for a virus-free economy in 2022, Credit Suisse strategists said Wednesday.
  • The team led by Jonathan Golub initiated a 2021 S&P 500 price target of 4,050 in a note to clients, implying a 12% rally from Tuesday’s closing level.
  • Various vaccine candidates vying for regulatory authorization led the bank to “de-emphasize the near-term” and instead focus on how the US economy will launch out of its virus slump. 
  • “The virus will be a fading memory” in 2022, the team said, and the rotation to cyclical stocks will be “largely behind us.”
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With several coronavirus vaccines vying for regulatory approval, Credit Suisse says the key to investing in 2021 is positioning for “a more normal world” in 2022.

Strategists led by Jonathan Golub initiated a 2021 S&P 500 price target of 4,050 on Wednesday, implying a 12% rally from Tuesday’s closing level. Earnings per share will grow by 20% in 2021 and another 13% the following year as the US economy fully reopens and revenues rebound to pre-pandemic levels.

Investing in 2021 will an “art of predicting the future in the future,” the team said in a note to clients. If approved, vaccine candidates from Moderna and Pfizer and BioNTech are expected to reach the public early next year, with the most vulnerable populations receiving the first doses. Forecasts for widespread containment of COVID-19 in 2021 forced the bank to “de-emphasize the near-term” and shift its focus to what a virus-free economy will look like.

“As we look toward 2022, the virus will be a fading memory, the economy robust, but decelerating, the yield curve steeper and volatility lower, and the rotation into cyclical largely behind us,” the strategists said.

Read more: MORGAN STANLEY: Buy these 21 stocks set to soar at least 50% as their earnings rebound from a COVID-induced rout

Current risks to the team’s outlook are relevant but “likely to fade,” they added. The US reported 155,835 new COVID-19 cases on Tuesday, bringing the nation’s total above 11.2 million. Several cities have already reinstated lockdown measures to curb the virus’s spread, and such shutdowns could cut into the critical holiday season. Fresh stimulus could help offset the economic restrictions, but a package remains “politically unattainable,” Credit Suisse said.

Investor optimism is also already “extremely extended,” making any hold-up in vaccine production and distribution a major risk to stocks’ lofty levels. Still, successful vaccination of front-line workers and seniors would accelerate the return to normal, the team said.

Credit Suisse recommended investors hold overweight stakes in tech stocks and financials through the recovery. Faster sales growth and superior margins set the former group up to outperform, while improving credit conditions and a steepening yield curve will bolster bank stocks.

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Cyclical stocks will perform well in the near term as investors shift out of defensive bets. Yet the largest gains for the economy have already played out, and momentum will likely moderate through next year, the strategists wrote.

Non-cyclical stocks are set to lag as the economy rebounds, and rising rates cut into any dividend-yield appeal, they added. The healthcare sector presents the single exception, as “a more robust earnings trend” will fuel outperformance, according to the bank.

The S&P 500 closed at 3,609.53 on Tuesday, up roughly 12% year-to-date.

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