Credit Suisse Expects Investors to Pay a Higher Multiple



Credit Suisse’s S&P 500 target

After the equity markets fell in the fourth quarter of 2018, Credit Suisse (CS) slashed the S&P 500’s (SPY) target for the end of 2019 from 3,350 to 2,925 in December. On March 18, Credit Suisse increased the target to 3,025, as reported by Bloomberg. Credit Suisse’s chief US equity strategist, Jonathan Golub, is getting bullish on the markets as they come out of their slumber after five months.

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Markets rally after slumber

Looking at the markets’ first-quarter performance, the S&P 500 (SPY) rose 13.1%. Among the FAANG pack, Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) rose 27.2%, 18.6%, 21.0%, 33.2%, and 13.3%, respectively. The Chinese stocks that got hammered last year also posted decent returns. Alibaba (BABA), Baidu (BIDU), and JD.com (JD) rose 33.1%, 3.9%, and 44%, respectively, in the first quarter.

Improved sentiment to drive higher multiple

While Golub thinks that the earnings could be slowing down more than expected, he thinks that investors might be willing to pay a higher multiple due to the improved sentiment. He said, “Investors have not fully re-risked portfolios following 4Q’s turbulence — despite a sharp decline in volatility and spreads — and … valuations will drift higher as they do so.”

However, Golub reduced his earnings estimates for the S&P 500 for 2019 from $174 to $170 due to weakness in Apple (AAPL) and energy producers (COP) (CHK).

Investors could pay a higher multiple if the sentiment improves with solid and sustainable fundamentals. The current market rally is mainly due to the expansion of the multiple rather than the earnings estimate expansion. Another market rally could only ensue if analysts’ estimates also reflect the improved sentiment.


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