Citi raises S&P 500 forecast, citing 'incessant Fed support'

Published Tue, Jul 7 20207:44 AM EDTUpdated Tue, Jul 7 20209:06 AM EDT

(This story is for CNBC Pro subscribers only.) Citigroup just bumped up its year-end target for the S & P 500, citing "incessant" support of the Federal Reserve that has caused the market to blow past its previous forecast. Citigroup hiked its 2020 S & P 500 target to 2,900 from 2,700. Citi's new forecast, released Monday, still calls for about a 10% decline. "While our fundamental assessment still implies downside from current levels, it is more probable that the trading range for the market should be 2,700-3,200 given powerful fiscal and monetary stimuli (with more likely from government next month)," Citi chief U.S. equity strategist Tobias Levkovich told clients in a note. The S & P 500, which closed at 3,179.72 on Monday, has roared back from the coronavirus market rout. A lot of the comeback can be attributed to the Federal Reserve, which has stepped in in an effort to shore up the economy from the coronavirus crisis. Among other things, the central bank has slashed interest rates to near zero and announced an unprecedented unlimited asset purchase program. Powell said last week that "the path forward will also depend on the policy actions taken at all levels of government to provide relief and to support the recovery for as long as needed." Thanks to the central bank's efforts, the market rallied past Citigroup's 2,700 target, and the firm is throwing in the towel on its original call. "Jay Powell's words also must be remembered as the FOMC sees the need to be very accommodative, possibly through 2022," said Levkovich. "We think that barring a big shock, it is improbable to think of a trading range for the S & P 500 in the 2,500-3,000 area but more likely in the 2,700-3,200 vicinity as monetary policy will be in place to prevent a 20% or greater decline." Levkovich said a higher multiple on 2021 earnings forecasts is likely given the Fed's and aggressive policy to support risk assets. Applying a 19 times multiple, instead of the previous 18x multiple, to Citi's $150 per share earnings estimate for 2021 generates the 2,900 perspective. "We have seen a greater forward P/E in the past (of 20x), both in 2002 and 2009, but there is a more elevated risk premium in place currently, such that the boost from low rates may not be as helpful this time," Levkovich said. "With a central bank ready to comment or act on any pullback, the plausibility of retesting the March lows seems slim." Even with the new call, Citi is one of the biggest bears on Wall Street, according to CNBC's Market Strategist Survey . Most equity strategists see the S & P 500 finishing 2020 above 3,000, with the biggest bull forecasting a 3,435 year-end level. — with reporting from CNBC's Michael Bloom.

Federal Reserve Chairman Jerome Powell, wearing a face mask, testifies before the House of Representatives Financial Services Committee during a hearing on oversight of the Treasury Department and Federal Reserve response to the outbreak of the coronavirus disease (COVID-19), on Capitol Hill in Washington, U.S., June 30, 2020.

Tasos Katopodis | Reuters

(This story is for CNBC Pro subscribers only.)

Citigroup just bumped up its year-end target for the S&P 500, citing "incessant" support of the Federal Reserve that has caused the market to blow past its previous forecast.