Can the S&P 500 index top 3,430 — another 10% leg up?
It may sound like a stretch, but Nicholas Colas, Co-founder of DataTrek Research, says it’s doable. “The bottom line: the next 10% in the S&P is 100% going to be about post-COVID crisis economic recovery,” Colas said. Here’s what that will look like.
If stocks rally, it will be because of fundamental and technical strengths in financial, industrials and consumer discretionary stocks, Colas said.
Financials make up 11% of the index /zigman2/quotes/210599714/realtime SPX +0.06% , and have the lowest multiple of any sector of the index, Colas noted. They’re also 21% below their February highs. Investors are likely to reward financials if an economic recovery seems at hand.
The S&P 500 Financials sector is already up for a third consecutive week, on pace for its longest weekly winning streak of the year, according to Dow Jones Market data.
Industrials make up a smaller component — 8% — and are 16% below their February highs. “This group is chock full of US recovery plays: Union Pacific Corp. /zigman2/quotes/209717171/composite UNP +1.85% (5.8% sector weight), Honeywell (5.2%), UPS /zigman2/quotes/201245396/composite UPS +7.86% (3.5%) and Caterpillar /zigman2/quotes/203434128/composite CAT +0.39% (3.3%) for example,” Colas said.
While consumer discretionary has seen a big run-up, with some heavy hitters like Home Depot Inc /zigman2/quotes/208081807/composite HD +0.84% already punching to new highs, other stocks with fairly hefty weightings in the sector have not: McDonald’s Corp. /zigman2/quotes/203508018/composite MCD +0.70% (6.5%), Nike Inc. /zigman2/quotes/203439053/composite NKE +1.40% (5.8%), and Starbucks Corp. /zigman2/quotes/207508890/composite SBUX +0.17% (4.2%) have not.
For some context, Colas notes, he and his co-founder published a note on April 15, when market and economic conditions still seemed bleak and nerves jangled, laying out a roadmap to a 3,200 level for the S&P 500. “That seemed a stretch at the time,” Colas wrote Thursday, but now it’s just 2% away.