When Zacks divided $105 projected earnings next year by a current S&P 500 reading around 1430, we got a 7.34% earnings yield. We took this as solid proof on the undervalued nature of stocks. In light of this yield, we are very comfortable putting out a 2013 target of 1600 for the S&P. That is still only an earnings yield of 6.56%.
Is it time to buy in early January?
Looking out 6 to 12 months, a number of Zacks in-house strategists see the S&P 500 much higher than it is now. In fact, it could be well above the previous high of 1470 level, with a bull case of 1550 by summer. With a firmer resolution of the “Fiscal Spending Cliff” later, stronger housing markets, more evidence of successful European interventions, or a China growth pick-up, stocks go higher still. Our pessimistic strategists point to the weak elements in the global outlook.
In fact, if we get towards the end of the year with U.S. GDP in healthy shape and no U.S. recession is on the horizon, we could get a good stretch above 1600.
The S&P 500 is a balanced global index. For Q4, total earnings for companies are expected to be up +1.2% over the same period last year. 45% of company revenues are earned abroad. Europe and Japan’s economies look flat at best. With a growth turnaround in China and India, heavy Asia-exposed S&P 500 sectors (IT, Industrials, Materials) may be where both value and growth is found in 2013. But Materials price outlooks are weak.
The remaining 55% of U.S. earnings tied to the S&P carry lower “Global Macro” risk to Europe and Japan. A further rise in the U.S. housing market offers ongoing fundamental support to U.S. large and mid-cap stocks. We remain bullish on U.S. stocks.
Our worries hail from within a modest global GDP growth outlook.
Below are details...
December’s End 2012 -- Zacks Sector and Industry Outlook
(A) With a rise in U.S. jobs numbers, improved consumer confidence, and the holiday shopping season, Consumer Staples and Consumer Discretionary retail were two key sector strengths: Apparel, Food/Drug Retail, Non-Food Retail/Wholesale and Packaged Foods.
However, the Consumer Electronics and Autos-Tires-Trucks industries showed us very weak Zacks Ranks.
(B) Other high Zacks Ranked goods and services industries arrived from building domestic U.S. momentum in the Housing Recovery.
A housing-related industry that has a strong Zacks Industry Rank is Home Furnishing-Appliances. Building momentum in U.S. housing also helps the Financials sector. We see a strong Zacks Industry Rank for Real Estate.
Interestingly, Building Products showed up as unattractive in late December.
(C) Slight improvement in a global outlook appeared to restrain Materials. Weakness is apparent in poor Zacks Industry Ranks for Chemicals, Paper, Steel and Metals-non-Ferrous. The price outlooks are not great.
(D) In addition, there is notable weakness in Industrial sectors on this modest global outlook. Industrial Products, Metal Fabricating and Electronic Components Industries struggle.
Another industrial-related global industry showing ongoing weakness?
(E) IT sluggishness may be a notable feature in modest global GDP growth, though December saw improvement in IT Zacks Ranks. Computer Software & Services was the highest ranked IT Industry in late December.
A shift to smaller screen tablets and mobile may not be helping either. Late December saw the weakest IT Zacks Rank for the Electronics industry.
(F) Europe slowdown issues play out with a Market Weight rating to Energy.
At best -- An Underweight for the Energy sector is not out of the question.