Equity Research
22 April 2021
U.S. Equity Strategy
Continued EPS surprise vs pervasive
overvaluations: Who wins?
The streak of strong positive EPS surprises is likely to continue,
but elevated valuations have now become pervasive; sentiment
is too optimistic; and a potential change in corporate taxation is
an overhang. We raise our SPX FY21E EPS to $190 and our 2021
price target to $4,400 but caution that further upside is unlikely.
Consensus is not incorporating recent EPS surprises. Although S&P 500 earnings have
surprised three times in a row, consensus has not incorporated these into future earnings. Each
successive beat has been viewed as a one-o event and has had only a modest eect on
earnings projections, eectively lowering QoQ growth forecasts. We construct a simple “surprise
catch-up” model that applies pre-earnings announcement QoQ growth forecasts to actual EPS
and show that it would have done a remarkably good job in forecasting 20Q3 and 20Q4 earnings
and would have been equally eective during the 2009 recovery from the credit crisis. Our
model currently forecasts CY21 earnings of $195 versus the current consensus expectation of
$176. This is not that far from our top-down model forecast of $190, which relies solely on
economic forecasts, but much below our bottom-up model, which starts with consensus.
Hence, we raise our SPX FY21 EPS forecast to $190 from $173.
We expected SPX valuation to contract, but not enough to oset higher EPS growth.
Current SPX valuations look highly elevated and are facing several notable headwinds that
should cause a contraction to more reasonable levels by EOY 2021. These include: 1) the rise in
valuations for many cyclical sectors, beyond just the names with medium-term positive
exposure to Covid-19, 2) overly optimistic retail sentiment, as seen in strong fund flows, strong
readings in the AII Bull-Bear indicators, high levels of call buying by retail investors, and
increasing hedge fund beta, 3) an overhang from a potential corporate tax hike, which could
impact SPX EPS by as much as ~8% in FY2022, and 4) strong indications that we are well into the
early/middle expansion phase of the business cycle, which is usually a period of valuation
contraction. Given these significant headwinds, we expect the SPX P/E to decline from
28.8x currently to 23.1x by the end of 2021. Our target FY21 P/E of 23.1x combined with a
target EPS of $190 results in an SPX 2021 price target of $4,400.
We upgrade Financials to OW and downgrade Hardware & Semis ex FANMAG to MW. Our
multi-pronged approach to sector allocation marries our valuation framework with our
“surprise catch-up” model, the allocations for our optimal business cycle stage basket, impact
from potential enactment of President Biden’s fiscal plan, and industry-specific factors for each
sector. We upgrade Financials to OW as our “surprise catch-up” model indicates higher FY21 EPS
Barclays Capital Inc. and/or one of its ailiates does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could aect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
Please see analyst certifications and important disclosures beginning on page 23 .
FOCUS
Macro Strategy
U.S. Equity Strategy
Maneesh S. Deshpande
+1 212 526 2953
maneesh.deshpande@barclays.com
BCI, US
Elias Krauklis
+1 212 526 9376
elias.krauklis@barclays.com
BCI, US
Japinder Chawla, CFA
+1 212 526 2771
japinder.chawla@barclays.com
BCI, US
Completed: 22-Apr-21, 01:05 GMT Released: 22-Apr-21, 04:10 GMT Restricted - External
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