Deutsche Bank Eyes 7K; Morgan Stanley Bullish Shift

The trajectory towards the S&P 500 reaching the remarkable milestone of 7,000 points by the end of 2025 is becoming a hot topic among financial analysts and market watchers alike. This outlook is largely fueled by the expectations of strong and consistent earnings growth. Notably, analysts at Deutsche Bank have predicted that an environment of robust investor activity and significant corporate buybacks will support the market dynamics necessary for such an ascent.

Deutsche Bank's recent investor report emphasized a solid supply-demand backdrop for the U.S. stock market, even under conservative assumptions. “We believe the S&P 500 will rise to 7,000 points next year,” the report stated confidently. The German banking giant estimates that corporations could repurchase as much as $1.3 trillion in their own stock from investors, outpacing the projected $1.1 trillion in buybacks from this year.

A prominent team led by Bankim Chadha, the chief equity and global strategist for Deutsche Bank in the U.S., articulated an optimistic view of persistent capital inflows into equities and bonds alike. This expectation is particularly salient, given the current climate of strong risk appetite among investors, which may temper yet maintains a bullish outlook moving forward.

The S&P 500 has already seen remarkable upward movement, climbing approximately 25% this year, spurred by the momentum of popular large-cap technology stocks and encouraging data regarding the labor market, inflation, and GDP growth. Earlier this month, on November 8, the S&P 500 index notably surpassed the 6,000 point mark for the first time in history. Deutsche Bank’s forecast of 7,000 points implies a further upswing of about 16% from current levels.

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There are additional indicators suggesting that the equity market has yet to peak. Chadha elaborated on this, stating, “We believe various aspects of the economic cycle are still in play, including inventory reductions leading to restocking; a rebound in capital expenditures outside the tech sector; a revitalization in manufacturing; increasing consumer and business confidence; a resurgence in capital markets and M&A activities; an uptick in loan growth; and economic growth in other regions of the world.” This speaks to a broader economic resilience that may be supporting market trends.

On the policy front, there appear to be both positive and negative components mixed into the government's approach. The order in which these policies are implemented will reportedly be significant, with expectations that tax cuts and deregulation will be prioritized over tariffs.

As a key driving force behind this bullish market sentiment, Deutsche Bank anticipates that S&P corporate earnings will rise by 11.6% next year, reaching $282 per share, compared to an expected growth rate of 11% for 2024. Furthermore, if global economic growth bounces back to its historical upper limits, those growth figures could potentially rise to 17%, pushing S&P 500 earnings per share to $295.

Deutsche Bank’s target price places it well ahead of several other bullish forecasts on Wall Street. A host of banks and analysts share an optimistic outlook for the upcoming year: UBS and Morgan Stanley have projected the S&P 500 will reach 6,500 points, while Goldman Sachs and Bank of America are slightly more aggressive with estimates around 6,600 points, and investment firm BMO is tipping the index to hit 6,700 points. Interestingly, Yardeni Research aligns with Deutsche Bank's most ambitious estimate of 7,000 points.

The shift in perspective isn’t limited to Deutsche Bank. The equity strategy team at JPMorgan has also turned bullish on U.S. stocks, with their chief global equity strategist, Dubravko Lakos-Bujas, targeting 6,500 points for the S&P 500 by the end of 2025, which is above the strategist consensus around 6,300 points. Lakos-Bujas's optimism is rooted in expectations of a robust U.S. labor market, declining interest rates, and a surge in capital expenditures spurred by the race for dominance in artificial intelligence technologies.

Prior to his departure earlier this year, Marko Kolanovic had led the JPMorgan strategy team. Kolanovic, who had held a bearish stance on U.S. stocks since the end of 2022, set a target of 4,200 points for the S&P 500 for nearly two years. However, in 2023 the U.S. stock indices exceeded this threshold, even eclipsing 6,000 points, prompting colleagues on Wall Street to revise their outlooks positively. Lakos-Bujas took over the market research responsibilities amidst these changes.

This new perspective from JPMorgan stands in stark contrast to most of the warnings issued by the bank's strategists for much of the last two years. As 2024 approaches, the team cautioningly noted that an economic slowdown could exert pressure on corporate earnings. They also indicated that high valuations, crowded positions, and low volatility render the stock market “very vulnerable.”

In summary, the S&P 500's anticipated trajectory towards 7,000 points by 2025 encapsulates a blend of optimistic predictions driven by corporate profits, investor enthusiasm, and overall economic indicators. Yet, the landscape remains complex, underlining the critical nature of policy developments and market sentiment as investors navigate the coming years.