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S&P Sees Benchmark Index Hitting 1270—After a Correction

Standard & Poor's has raised the price target for its benchmark index even though the firm thinks stocks are overdue for a 10 percent drop.

New York Stock Exchange Traders
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New York Stock Exchange Traders

The S&P 500 now should hit 1270 by the end of 2010, a revision from an earlier projection of 1215 and a number that would represent a 7 percent gain from its current level.

The firm believes gross domestic product and earnings will be higher than initial projections.

Bull-market runs such as the current one off the March 2009 lows almost always come with a 10 percent correction along the way. But so far the S&P has only seen a series of five mini-corrections of 5 percent to 8 percent drops even as the index has gained 75 percent.

"We still believe that the stock market is close to peaking and believe the risk far outweighs the reward at this point," the firm said in a research note. "Stocks are extremely extended on both a price and time basis, and in our view a pullback or correction could begin at any time."

The most likely scenario, S&P said, is for a 10 percent to 15 percent fall into autumn or the first quarter of 2011. And it also projected a lull in the market before the index makes another run higher.

"We continue to see extreme readings from many sentiment indicators with put/call ratios falling to levels not seen in several years," S&P said. "At the same time, many indices as well as individual stocks are overbought on both a daily and weekly basis, suggesting to us that the majority of gains have been seen for at least the intermediate term."

The firm noted, though, that current valuations compared to earnings do not seem high. The S&P is trading at a trailing price to earnings ratio of 16 times earnings when compared to full-year projections of $82 in earnings per share for the S&P 500.

In its 10-sector index breakdown, S&P is overweight health care, industrials and information technology; market weight on consumer discretionary, energy, financials and materials; and underweight consumer staples, telecomms and utilities.