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Deutsche's David Bianco "Forecasts" The S&P (In One Simple Chart)

Tyler Durden's picture




 

While not exactly a "bear", Deutsche Bank's David Bianco - until this weekend - had the lowest S&P 500 target for 2014 year-end at 1,850. That's all changed now...

 

Laszlo Birinyi would be proud...

 

Via Deutsche Bank,

We raise 2015 yearend S&P 500 fair value target 7.5% to 2150 from 2000

We still expect a long lasting economic expansion of moderate growth, which should rival the US record of 10 years with S&P EPS growth averaging 6% until the next recession, on 5% sales growth, flat margins, 1% share shrink. Despite entering the latter years of a typical expansion and high margins vs. history, we now think the trailing S&P PE should average 17 vs. 16 until elevated recession risk returns. This is because we now expect long-term real interest rates to stay below normal through 2016 and thus lower our S&P 500 real cost of equity estimate from 6.0% to 5.5%. We raise 2014 and 2015 yearend S&P targets to 2050 and 2150 from 1850 and 2000 and introduce 2300 for 2016 yearend.

PEs can stay above normal if long-term real interest rates stay below normal

Good reasons exist for decent EPS growth and yet subnormal interest rates, which justifies trailing PE of 17 or higher. Although a 17 PE exceeds the trailing PE average of 16 since 1960, it is lower than the last 20 year average of 18.5. While long-term real EPS growth will likely lag the 5% average since 1994, real interest rates are likely to be lower. Assigning a higher PE based on lower real interest rates, makes it important that inflation risk stays dormant to prevent long-term rates from returning to historical norms. Despite the DCF math of lower rates justifying higher PEs, investors are likely to be skeptical of sustaining both decent EPS growth and subnormal interest rates, causing the index to advance only in-line with EPS growth next year as a correction is more likely on any growth or inflation scare if the trailing PE pushes above 18.

2014 S&P target – 2050, 17 PE: 1) 2015-2016E EPS growth >5% and DPS growth >10%, 2) Fed stops purchases and 10yr Tsy yield <3% at 2014 end, 3) Midterm elections result in a small Republican majority in Senate.

 

2015 S&P target – 2150, 17 PE: 1) EPS growth outlook stays >5%, 2) Fed hikes slowly, 10yr Tsy yield <3.5%, 10yr TIPS 0.5-1.5%, 3) oil >$90/bbl. 4) strong Banks DPS growth upon less litigation, manageable capital rules.

 

2016 S&P target – 2300 (+/- 100), 16-18 PE if: 1) Still no recession on the horizon, 2) Fed rate hikes stop 2-3% on low inflation despite good growth, 10yr Tsy Yield <4%, TIPS yld ~1.5%. 3) lower repatriation taxes to sustain strong DPS growth. If inflation stays low as growth persists, allowing an extended pause in overnight rate hikes this could sustain an 18 PE. However, if hikes continue above 3% the PE is likely to decline toward 16.

We expect ~6% EPS growth in 2015-2016 and ~15% DPS growth as payout nears 40% of EPS. Our 2014E, 2015E and 2016E EPS are $119, $126 and $134.

Recession and Bear market still distant, but dips and correction risk significant

Uptick in the US labor force participation in July and a weaker Europe deferred the interest rate risk we feared this summer and caused S&P to exceed 2000. However, stocks have yet to confront 10yr Tsy yields >3%, which we think is likely next year, and will test the ability of PEs to stay above average. This expansion should be long lasting, as it took longer than usual to gain momentum, inventories and capex remain measured, home building has upside, loan growth is better but still subnormal and both bank and household balance sheets are stronger. But lower oil prices threaten S&P EPS, especially if China slows. Weak oil hits Energy earnings and capex, which hits Industrials.

The S&P 500 can probably reach 2500 before suffering a 20%+ bear market decline

The two major threats to the S&P 500 are either a recession or a rapid increase in interest rates. However, assuming that the US avoids a recession – and no other global factor causes a significant decline in S&P EPS – and that US interest rates climb slowly and rise to a level that plateaus below historical norms, then 2500 is within reach for the S&P 500 by 2018. The risk of a correction will climb as investors take concern with the longevity of the expansion and the risk of tightening monetary policy, which likely curbs the PE and price gains especially in 2016-2018. Dips are likely along the way and probably at least one correction upon a global growth or inflation/ interest rate scare.

While we see 2500 as a reasonable fair value for 2018 end, either a correction in the next couple of years or a bear market even if several years from now could put the S&P 500 back under 2000. As a bear market triggered by a recession, in which S&P EPS declines 20% on average from 4-quarter peak to trough and forward PEs tend to fall below average until the economy and EPS stabilize (then PEs rise above average) could erase all further cycle gains. Thus, it’s unlikely the S&P stays above 2000 through the rest of this cycle into the next unless EPS growth gets stronger or the cycle is very long.

A recession triggered by problematic inflation causing interest rates to climb above normal is the worst threat to retaining further S&P 500 gains we anticipate from this cycle as both EPS and the PE would suffer. This risk appears low at this time, but this is a long-term risk and long-term outlooks are very uncertain. At this time, we are more focused on data that confirms the likely longevity of the expansion to stay constructive.

*  *  *

In summary - assuming nothing bad happens and assuming the same linear trend happens for another 4 years, the S&P 500 can rally to 2500 with no meaningful drops... oh ok then!

*  *  *

Don't Forget... strategists have not been great (i.e. terrible) at forecasting the S&P...

 

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Mon, 09/08/2014 - 12:04 | 5193748 takeaction
takeaction's picture

The dollar keeps getting sooo strong.  Weeee.  

.

Think Barry can hold this shit storm together until after the election?

Mon, 09/08/2014 - 12:06 | 5193766 CPL
CPL's picture

Judging by solar acivity right now.  I doubt there will be money or governments or business in it's current form.

Got barter and trade?

Mon, 09/08/2014 - 12:16 | 5193804 Skateboarder
Skateboarder's picture

Got useful skillz, bitchez? Apart from your small stash of tradable things, your hands, feet, and noggin are all ye need in a prosperous future without modern technological enslavement. Hah, imagine people talking to each other again.

Gold and silver this AM... all you have to do is look at the chart for all of 2013 to see the trend. This is the start of third dip below/around 19. Back to 21-23 by the end of the year.

Mon, 09/08/2014 - 12:18 | 5193834 Pool Shark
Pool Shark's picture

 

 

Bianco Borrows Birinyi's Benchmark...

 

 

Mon, 09/08/2014 - 12:27 | 5193865 kaa1016
kaa1016's picture

Birinyi has been right.

Mon, 09/08/2014 - 12:30 | 5193883 Skateboarder
Skateboarder's picture

2014, I meant to say. It feels like groundhog day, so not that it matters anyway. :-)

http://silverprice.org/charts/history/silver_1_year_o_b_usd.png?0.669964...

It's not very difficult to see when the next 'peak' will be orchestrated.

Mon, 09/08/2014 - 12:14 | 5193794 orangegeek
orangegeek's picture

Exactly!!!  Barry is going to throw everything he has at this until after November mid-terms.

 

ISIS crisis anyone?  How about an immigration shit show??

 

Oh wait!!! How about the economy Barry???  LMFAO!!!!

Mon, 09/08/2014 - 12:14 | 5193811 Bananamerican
Bananamerican's picture

Barry's got NOTHING to do with this and the mid terms don't mean shit

Mon, 09/08/2014 - 13:24 | 5194120 Everybodys All ...
Everybodys All American's picture

Barry only takes credit when it works otherwise he has nothing to do with it. Is that about right?

Mon, 09/08/2014 - 12:23 | 5193841 Eireann go Brach
Eireann go Brach's picture

Says the moron working at Deutsche Bank, the same bank that will implode soon and send a derivative Tsunami around the financial world, which will also leave his 401k worth $5. Fucking idiot! 

Mon, 09/08/2014 - 12:02 | 5193749 JustObserving
JustObserving's picture

Manipulated markets are so easy to predict since volatility has been squeezed out.  Even a caveman can do it. And, perhaps, even an economist.

Mon, 09/08/2014 - 12:36 | 5193911 WillyGroper
WillyGroper's picture

So I wonder when JPM will pull this rug out?

They've really got it all sown up. 

Mon, 09/08/2014 - 12:04 | 5193757 smcapmachine
smcapmachine's picture

Articles like this make net short zerohedge readers crap their pants

Mon, 09/08/2014 - 12:09 | 5193758 SheepDog-One
SheepDog-One's picture

Must be a typo, surely he means 2150 by 2014 end not 2015. With the avg S&P gain of 10 points a day that's only 15 days, easy.

Mon, 09/08/2014 - 13:27 | 5194125 lordylord
lordylord's picture

A child (or anyone trying to scam the middle class into buying overpriced stocks) can "predict" this trend.  I mean how much fucking effort was put into making Fig. 2?  Nobody can forecast the markets in 2018.

Mon, 09/08/2014 - 12:05 | 5193768 Spungo
Spungo's picture

It'll get there if they print enough money.

Mon, 09/08/2014 - 12:06 | 5193771 ebworthen
ebworthen's picture

To the moon!

It will never end!

Bartender!  Another round of shots!

Mon, 09/08/2014 - 12:07 | 5193775 Bighorn_100b
Bighorn_100b's picture

I just keep thinking about the book "The Great Gatsby".

Mon, 09/08/2014 - 12:09 | 5193781 Dubaibanker
Dubaibanker's picture

Interestingly, Goldman Sucks also raised their target today to 2,150 for the S&P...so it is a herd mentality thing.......not that any research forecaster knows anything about the future....if they knew...then they would have predicted Merrill...Bear...Lehman...prices of potatoes and apples in Spain or something at least? One thing, maybe?

Mon, 09/08/2014 - 12:11 | 5193790 fed_depression
fed_depression's picture

Two things I note:

Forward options only pricing in 5% premium per year.

 

And the continued thesis that markets can ONLY go up over time. Therefore, it's impossible for a market to go flat for time or down anymore. Even though there's been quite some history where we've had both down periods and if I remember right even a 10 yr flat period.

Mon, 09/08/2014 - 12:39 | 5193923 Professorlocknload
Mon, 09/08/2014 - 12:11 | 5193792 kurzdump
kurzdump's picture

Time to say goodbye to my lecture about technical analysis.

y = k * x + d does the trick nowadays.

Mon, 09/08/2014 - 12:13 | 5193796 enforcer92677
enforcer92677's picture

I'll be the first to admit I don't know shit about shit.  But on this?  I'm calling bullshit.

Mon, 09/08/2014 - 12:16 | 5193820 q99x2
q99x2's picture

Ask the central banker's programmers what the S&P will be at in 2018.

Mon, 09/08/2014 - 12:21 | 5193842 Yen Cross
Yen Cross's picture

    Did this guy suck Joe LaVorgnas' cock this weekend?

Mon, 09/08/2014 - 12:21 | 5193846 IronShield
IronShield's picture

No, it will be over long before that.  Latest is end of 2015; not surprisingly close to elections.  Hmmm...  Wonder what crisis will be manufactured to complete the tyrannical picture?  Indeed.

Mon, 09/08/2014 - 12:36 | 5193906 vegas
vegas's picture

Can we get a visionary forecast from Stolper and Gartman? That's all you really need for guaranteed profits.

 

www.traderzoo.mobi

Mon, 09/08/2014 - 12:36 | 5193909 Professorlocknload
Professorlocknload's picture

7.5% Devaluation per year? Yup, dovetails with the Feds real target of 6-9% per year to satisfy pension actuaries needs and expectations.

Control the price of money, and you control the means of production.

What's that resemble?

Mon, 09/08/2014 - 12:43 | 5193933 jubber
jubber's picture

to be fair to Laszlo Birinyi he was predicting the current ridiculous levels years ago, I remember laughing my socks off at the time...guess he got what the Central Banks were doing long long before anyone else did?

Mon, 09/08/2014 - 12:48 | 5193962 rejected
rejected's picture

Would the Tylers or someone explain the rise of the dollar... It's above 84 now. What's the scam?

Mon, 09/08/2014 - 12:49 | 5193965 AGoldhamster
AGoldhamster's picture

Even a blind can see that the prevailing trend is steeper than the one projected by that comedian.

SnP > 22xx as of 2014 and close to 3000 in 2015 and above 4000 in 2016. Then SHTF.

Mon, 09/08/2014 - 12:53 | 5193977 buzzsaw99
buzzsaw99's picture

the untaper cometh as a thief in the night

Mon, 09/08/2014 - 13:05 | 5194034 TheRideNeverEnds
TheRideNeverEnds's picture

And next year after we print 2500 on the S&P he will revise his targets again.

Mon, 09/08/2014 - 13:32 | 5194147 nakki
nakki's picture

The idea that we could go a few more years without a meaningful correction is bit much. Just because it happened in the past (1990's) doesn't mean it will happen again. This country had a future in the past. Now all we have is an aging population that will be sucking of the system for the next 2 decades. EPS is a crap metric anyways. Buy backs and loading the companies balance sheet with debt is all a mirage. Without any wage growth and real jobs you can only paper over shit for so long. Of course I could be wrong, but S&P 2500 with GDP (another bullshit metric) at or around 19-20 trillion really seems a bit stretched to me.

Mon, 09/08/2014 - 14:11 | 5194373 bobbydelgreco
bobbydelgreco's picture

this is so stupid i am forced to comment i am 62 the fed will not go over 1% for as long as i live if it went to 3 the market would crash anyone who interfaces with the real world knows bad investments abound what i don't know is when it all goes bad

Mon, 09/08/2014 - 14:52 | 5194574 SheepDog-One
SheepDog-One's picture

I'll have completely lost my mind before S&P tacks on another 500 bullshit points, so I don't care.

Mon, 09/08/2014 - 17:06 | 5195179 scubapro
scubapro's picture

 

 

well its true.  even the bears hear on ZH are pushing it all out 6 months.    Since I am the last one, I will raise our flag!  The Top Is In!   R2000 at 1000 by Oct 15; and SPX at 1500 by Jan 31, 2015.     The headlines will all the be the same though, correction and 2150 by 2015.  only when its off 20% will anyone say, 'think theres a problem here Steve?"

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