Deutsche Bank raises S&P 500 year-end target after postelection rally

After a surprise postelection rally on Wall Street that took the S&P 500 within a few percentage points of its all-time high, analysts at Deutsche Bank raised their year-end target for the S&P 500 to 2,200 from their previous target of 2,150.

David Bianco, U.S. equity strategist urged going overweight two groups that had done particularly well over the past five sessions: health-care and large banks, as they believe those groups will take the index to 2,200 over the next several weeks and beyond.

On Monday, the S&P 500
SPX, +0.08%
closed nearly unchanged at 2,164.20 and is up 1.2% since the election and 5.9% since the start of the year.

The new target reflects slightly higher estimated earnings per share for the S&P 500, as the strategist and his team are now expecting $119 instead of $118, following better-than-expected third-quarter results.

Wall Street forecasts are notoriously unreliable as variables that impact prices are themselves a moving target. The simplest way strategists formulate a target is by estimating an aggregated earnings per share that is derived from individual estimates that are typically cut as earnings season nears.

Guessing a multiple that investors are willing to pay depends on sentiment, which is also impossible to predict with accuracy.

For example, at the beginning of the year, Bianco estimated EPS would be $120 and, at 15 times trailing earnings, the S&P 500 would finish 2016 at 2,250.

The S&P 12-month price to earnings ratio is currently at 19.5, according to FactSet.

The sectors that Bianco and his team favorhealth-care and large banksrallied nearly 3% and 11% respectively since last Tuesday.

But they are not enthusiastic about global cyclicals, instead seeing value as domestic bond substitutes.

We believe Republican-led policies of less regulation and tax cuts will help accelerate growth, further tighten the labor market, and accelerate S&P EPS growth, particularly when corporate tax cuts take effect. But we do not believe such policies spark a widespread jump in inflation, especially not for commodities, the note said.

For next year, the bank maintained its 2017 estimate for earnings per share at $128 with a 2,350 year-end target for the S&P 500, assuming 12-times trailing price-to-earnings ratio of 18.5.

We think energy and most industrials are overvaluedand fear energy might repeat its early 2016 dive. If U.S. trade policy turns protectionist, which we doubt, the retaliation will hurt U.S. capital goods firms. More U.S. infrastructure spending cant carry industrials, the note said.

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