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July 31, 2020, 10:51 a.m. EDT

Buy stock dips because the S&P 500 could ‘easily’ reach 3,500 next year, says Credit Suisse

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By Barbara Kollmeyer, MarketWatch


AFP via Getty Images
The dips.

Our call of the day from Andrew Garthwaite, Credit Suisse’s global equity strategy analyst, who believes the S&P 500 could “easily hit 3,500 on our models” by the end of next year. “The key to me is do you get a big correction? Do you get a fall of more than 10%? I don’t think so and the key is whether you want to buy into dips or sell into rallies and we want to buy into dips,” he tells MarketWatch.

Reason number one to keep buying? “We’re going to get a combination of easy money, easy fiscal, with yield curve control — i.e. fiscal QE [quantitative easing] — until unemployment returns to politically acceptable levels,” he says. Note, the Fed hasn’t committed to instituting yield curve control, though officials have said they are considering it.

And Garthwaite believes real bond yields — 10-year Treasury inflation-protected securities that have been tumbling on COVID-19 worries — are headed to minus 2%. “Why do you own a bond if it’s a non-diversifying return-less risk? As a result of that, we’ve seen flows into equities hold up abnormally well,” he says.

I nvestors have missed a couple of things, he says, firstly that policy is key, and that worries about a stock market that looks expensive — based on forward price earnings ratios for 2021 — matters less than the additional return they will get relative to falling bonds.

That said, he worries a bit about the disconnect between earnings revisions and equities, and overly optimistic credit spreads that imply a too-low default rate for companies, which could be problematic for stocks. Also on his mind are manufacturing new orders that may have peaked and overall heavy newsflow.

Garthwaite has a last bit of insight, and that is about the big technology stocks, which report earnings on Thursday and have been in the driver’s seat of market gains this year. Question: Will momentum fade if we get a vaccine or the virus recedes?

“I think the way you’re going to get a major rotation would be if there were in response to a strong economic recovery, a sharp rise in bond yields or a major change in policy from the Fed on interest rates, and I don’t see that,” says the strategist.

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Barbara Kollmeyer is an editor for MarketWatch in Madrid. Follow her on Twitter @bkollmeyer.

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