biggest bull on Street sees earnings, tax reform driving next leg

S&P 500 earnings are set to grow for a fourth-straight quarter, up 6.2 percent in the second-quarter, and are setting up for a record 12-month high of $123.61 in earnings per share, CFRA Chief Investment Strategist Sam Stovall said in a July 10 note. His 12-month forecast for the S&P 500 is 2,540, just over 3 percent above Friday’s close.

The second quarter earnings season kicked off Friday as some of the big banks began releasing results. Bank of America, Goldman Sachs, IBM, Morgan Stanley and Microsoft are among the big firms set to report results later this week. The S&P 500 traded little changed Monday morning.

“We believe the market may now be underpricing the most recent move in earnings revisions. Furthermore, we expect another solid earnings beat in 2Q amid low expectations,” Wilson said.

In addition to better earnings, Wilson expects clarity on tax reform will help stocks. The Senate last week shortened its August recess by two weeks to work on health care and other legislation, although the vote has been delayed until after Senator John McCain recovers from a surgery.

“No matter what gets passed in the next few months, we think just moving forward with a decision on the Affordable Care Act and taxes will provide the certainty necessary for companies and individuals to ‘act’ on their higher confidence readings which have remained elevated,” Wilson said.

The price-to-earnings ratio for the S&P 500 over the next 12 months “is stuck at approximately 17.5,” he said, but there’s a divergence within the index. Stocks with higher tax rates have seen their price-to-earnings multiples fall, while stocks with lower tax rates have seen their multiples rise, Wilson pointed…

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