Credit Suisse U.S. equity strategist Jonathan Golub has raised his 2021 year-end outlook for the S&P 500 index and believes that those caviling about lofty equity-market valuations are focusing on the wrong metrics.
In a research report disseminated widely on Thursday, Golub and his crew said they were lifting their target for the broad-market benchmark to 4,200, from 4,050, representing a more-than-10% gain from current levels, partly on the back of expectations of an even stronger economic reopening following the dual Senate wins of Democratic candidates in Georgia, which now confers a majority to President-elect Joe Biden as he is set to take the oath of office on Jan. 20.
“Democrats picked up both Georgia Senate seats, paving the way for Biden to implement his agenda more broadly,” the Credit Suisse strategist wrote on Thursday. “This should result in additional stimulus, including the expansion of payments to individuals,” the analyst said.
Golub told MarketWatch that any worries that stocks are getting too rich amid the record run-up are looking at the wrong metrics.
“All due respect to GMO’s Jeremy Grantham but we need to be looking at the right metric and P/E is not the right one,” he told MarketWatch in a Thursday interview.
Golub was referencing a recent report by Grantham, a veteran investment strategist of Grantham, Mayo, Van Otterloo & Co., in a research report dated Tuesday, which argued that valuations are bubblicious and described the current condition of the market as a “real humdinger” of a bubble that could deflate as soon as the spring.
Golub said that while the timeline for vaccination rollouts for COVID-19 have been “underwhelming,” he still foresees “a likely avalanche of pent-up consumer demand [that] cannot be ignored.”
The Credit Suisse analyst said that price-to-free cash flows is a better way of measuring stock values and argues that companies are generating more cash flow than they ever had historically and that it’s not just in the technology space where companies have been enjoying a pandemic bounce.
“These are higher cash-flow companies that are more valuable,” he told MarketWatch.
“Even the companies not in the tech area have doubled cash flow they generate for every $1 of sales,” he said.
Based on measuring companies that way, Golub sees many stocks trading at a discount.
The main U.S. stock benchmarks on Thursday finished at all-time highs, including the Russell 2000 index
the Dow Jones Industrial Average
the Nasdaq Composite Index
The S&P 500
also finished at an all-time closing high with a P/E at 22.53, FactSet data show.
“We are going to have the largest stimulative event in the history of the planet in the second half of this year…and there’s all this pent up demand,” Golub said, referring to the eventual reopening of the economy.
He said the real fear is overheating the economy, which might bring the Federal Reserve into play and force them to reduce some of their easy-money policies, but that is likely not an immediate-term issue.