Credit Suisse ups year-end targets for S&P 500, Euro Stoxx 50

Credit Suisse lifted its year-end targets for the S&P 500 and the Euro Stoxx 50 in its latest global equity strategy note on Friday.

The bank upped its target for the S&P 500 to 2,250 from 2,100 and for the Euro Stoxx 50 to 3,100 from 2,950. In addition, it introduced mid-2017 targets of 2,300 and 3,200, respectively.

Nevertheless, CS aid it expects a selloff in equity markets in the second half of next year and stuck to its benchmark weighting of equities.

In terms of what has remained supportive for equities, Credit Suisse pointed out that most financial proxies on cyclicality are consistent with flat to a modest slowdown in GDP growth, yet global PMI new orders, at a five-month high, imply a mild rise in global GDP growth.

In addition, it said excess liquidity is running at 8%, implying a re-rating of around 30%.

CS also highlighted central bank policy. “We continue to believe that central banks will continue to err on the side of caution and risk an inflation overshoot rather than risk recession (the template being the Riksbank)."

The bank also noted that most bull markets end on clear-cut overvaluation and a bubble in growth stocks and said neither has been seen yet.

However, a number of things have not improved and need to be monitored carefully, CS said.

“Our new US earnings per share growth forecast is just 3.6% for 2017, 9 percentage points below consensus. The main problem for earnings is that wage growth is accelerating (as well as excessive use of one-off factors and overstatement of earnings).”

It also said political risk remains a challenge for equity markets in the form of protectionism, lower immigration and a rise in minimum wages and said China housing and the growth in government infrastructure investments seem to have peaked.

“The risk near term is that bond yields rise more than the consensus expects (given that financial and economic proxies of cyclicality are improving, net long positions in bonds are extreme, fiscal easing and a trough in Japanese government bond yields).

“We think that equities can accommodate a 50-75 basis points rise in bond yields. We doubt the Fed would repeat the early Q1 experience of becoming more hawkish as lead indicators fall.”