BMO sees 17% market gain through year-end 2021 amid low rates, stimulus and record earnings recovery

Published Fri, Nov 20 20208:16 AM ESTUpdated Fri, Nov 20 20209:20 AM EST

(This story is for CNBC Pro subscribers only.) While the Covid pandemic is unlikely to subside anytime soon, BMO Capital Markets is calling for another year of double-digit stock gains in 2021, bolstered by low interest rates, unprecedented stimulus and rebounding corporate earnings. The Wall Street firm expects the S & P 500 to reach 4,200 by the end of 2021, which implies a 15% annual gain from BMO's 2020 price target of 3,650 and a 17% rally from current levels. The firm expects "interest rates to remain historically low for the foreseeable future. In addition, massive fiscal and monetary responses add another layer of strong support for continued stock market gains," BMO Capital Markets chief investment strategist Brian Belski told clients. Stocks have experienced a wild 2020 due to the economic impact from the coronavirus pandemic. After experiencing the fastest bear market in history in the first quarter, equities started their swift rebound off the March bottom, supported by historic monetary and fiscal stimulus. The federal government passed the largest rescue passage in U.S. history and the central bank created programs to provide liquidity to needy companies, among other assistance. "The massive fiscal and monetary response in the US and around the world (also unprecedented) will likely remain in place to combat its negative economic impact for the foreseeable future. Such environments have historically supported continued stock market gains and we see no reason why 2021 will be any different," said Belski. During the height of the pandemic, the Federal Reserve slashed interest rates to near zero in one of many efforts to shore up the economy that was reeling from the coronavirus shutdown. Belski believes these record low interest rates will continue to make equities more desirable next year. "Yes, valuations appear stretched at first glance, but they also need to be considered within the context of historically low interest rates and little inflation, ingredients that are likely to persist throughout 2021 and beyond, in our view. When viewed through this lens, we believe it is not unreasonable for market valuation to sustain (or even expand slightly) from its current level," added Belski. Another key driver of equity performance in 2021 is a recovery in corporate earnings, according to Belski. BMO has a $175 per share earnings forecast for the S & P 500, a nearly 35% jump from the pandemic depressed 2020 level. "In fact, aside from the global financial crisis, 2020 represented the swiftest quarter-over-quarter earnings collapse for the S & P 500 where index EPS plummeted nearly 50% during 1Q," said Belski. "Thus, we anticipate that 2021 has the potential to be one of the best years ever in terms of earnings growth, something we believe will also help to push stock prices higher." Belski said the consensus earnings estimates on Wall Street are too conservative given the potential for upward surprise in coming quarters. — with reporting from CNBC's Michael Bloom.

The Wall St. Bull is seen in the financial district in New York.

Brendan McDermid | Reuters

(This story is for CNBC Pro subscribers only.)

While the Covid pandemic is unlikely to subside anytime soon, BMO Capital Markets is calling for another year of double-digit stock gains in 2021, bolstered by low interest rates, unprecedented stimulus and rebounding corporate earnings.

The Wall Street firm expects the S&P 500 to reach 4,200 by the end of 2021, which implies a 15% annual gain from BMO's 2020 price target of 3,650 and a 17% rally from current levels.