Bull market has another 12% left: Strategist

Published Tue, Mar 24 201510:55 AM EDT

A Wall Street strategist predicts the S & P 500 will rise 12 percent to 2,350 by the end of 2015 with a final burst of multiple expansion before weak earnings flatten long-term returns. Here's why and how to trade it. Stifel's Barry Bannister said that deflation concerns will fade, the dollar will top out and foreign GDP growth will pick up, lifting the S & P 500 's price-earnings ratio and subsequently the price of the index. "We see deflation risk to EPS dissipating as the dollar shows signs of a top, the result of Fed caution and foreign growth exceeding investor expectations," Bannister wrote in a note to clients Monday. "If this feeds the reflation (without harmful inflation) case, we believe a late bull market P/E over-shoot to our 2,350 view for the S & P 500 is possible." There are three things that drive equity total returns: earnings, dividends and multiple expansion. Bannister is arguing it is time for the latter to take over. The S & P 500's price, P/E and earnings growth is displayed on the chart below. Source: FactSet One can see the S & P 500 continuing to march forward, but the P/E is pretty much the same it was back in 2010. Also earnings growth has topped out and many analysts believe it will be flat to down for 2015. The strategist believes interest rates will remain low, allowing the P/E to expand. The market's current P/E based on forward earnings estimates is 17 and Bannister sees that rising to 22 times as "part of a normal late bull market P/E over-shoot." Read More CFOs in dollar 'panic mode.' How to trade it The money play: As far as how to trade his call, the strategist said this: "Until the dollar tops/consolidates, which may now be occurring, trend winners in health care, consumer and technology have dominated. But if the dollar does consolidate due to a slow pace of Fed exit, GDP traction globally and reduced rate & global GDP differentials, then materials, industrials and energy could bounce in a stronger overall market. We see technology cap-ex as a long-term theme, recovering as labor and growth revive over more than a decade. We believe utilities and REITS lose support if the 10-year yield rises, while financials may be the tail of the whip, topping out the bull market 2016 with lending, rate/yield curve relief." As earnings growth remains sluggish, Bannister predicts the next 10 years will average an annual total return of 5.5 percent, below historical average returns of nearly 7 percent. "Periodic shocks" are ahead as well, he said.

Source: Stifel