Economic rebound, jump in profits fuels optimistic 2021 forecast from CFRA

Published Mon, Dec 14 202012:43 PM EST

A rebound in corporate profits coupled with an economy set to bounce back from the depths of the coronavirus pandemic should combine to produce a strong year ahead for the stock market, according to CFRA analysts. The firm expects the confluence of factors to lift the S & P 500 to 4,080 by the end of 2021, according to Sam Stovall, the firm's chief investment strategist. That target implies an 11.4% gain for the large-cap index from Friday's close. CFRA is the latest Wall Street firm to issue a buoyant forecast following one of the most volatile years in Wall Street's history. Following a year in which a nearly 11-year-old historically strong bull market came to a violent end, "optimism abounds," Stovall said in a note to clients. Despite the continuing pressure of rising Covid-19 cases and an economy expected to struggle over the next several months, "investors continue to look across the valley at encouraging economic projections and fundamental forecasts, along with tantalizing technicals and favorable historical bull-market and presidential-cycle precedents," he added. CFRA projects that real gross domestic product, which will show a contraction for the 2020 due to a recession that began in February, should rise 5.5% in the year ahead. Corporate earnings are forecast to increase 21.3% after a 16.2% plunge this year. The firm sees revenues up 5.5% in 2021 after a 3.4% drop in 2020. Looking into specific sectors, the firm is carrying overweight ratings on cyclical areas including discretionary, industrials and materials, as well as health care. It is underweight the defensive staples and utilities sectors, along with real estate. Stovall said other changes also are in store. "While some things might remain the same, such as stocks outperforming bonds and cash, we see the nascent rotation into mid- and small-cap stocks, as well as the re-attraction to value over growth and international equities to be maintained, as a result of EPS growth expectations and relative valuations," he wrote. "As with every year, however, investors should be prepared to withstand periods of elevated volatility." Political factors also are moving in investors favor. The change in administrations typically has been a harbinger for gains, with the first year in a presidency historically seeing a 14.3% gain since 1979.

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