Barclays Gives S&P Some Price Targets

Barclays gives its price targets for the S&P under 3 scenarios.

For Barclays, probably not this year.

Equities sell off at some point in every year, and 2017 will be no different with the natural oscillation of data and politics. But, the S&P 500 has finished higher than March levels 90% of the time after a positive start to the year. Solid fundamentals and a tax proposal point to further upside, Barclays equity analysts led by Keith Parker believe.

Their equity research team forecast S&P 500 earnings per share of $129 in 2017  for an 8% EPS growth rate over last year. Valuations have re-rated closer to “fair” and fund flows are still supportive, based on data from EPFR Global.  Equity fund inflows since the election have been just $100 billion, or 33% of 2015-16 outflows.  Money flow technicals is supportive of a further run. The market is mostly long now.

Barclays set an S&P 500 target of 2525 for 2017. It’s now 2370.  Their base-case valuation assumes no fiscal impact (good or bad), EPS of $129, and a trailing P/E of 19x, which is their fair value price tag.

Using three key scenarios for tax reform, they estimate a probability weighted “fiscal option” is worth around 75 basis points tacked onto the S&P in their base-case.

The bull case scenario brings the S&P to 2750 ( +300pts x 50% probability). This requires a 25% corporate rate, no border adjustment tax, and a personal tax cut. Potential upside is driven by higher GDP growth leading to an additional $3.2 higher S&P EPS and a 25% C-corp rate boosting EPS by another $11.4.

If there is a border adjustment tax, which they assign a 30% probability, then the market falls 100 basis points from the bull case.

The bear case is basically no reform this year at all, no movement on the tax front, sending the S&P lower to 2170. They assign this scenario a 20% chance of occurring.  Business optimism would decline and may take longer to recover given the mid-term elections in congress next year. For Barclays, an admission of tax reform failure by Trump would lead to a sell-off as the market zaps long term growth rates now priced into the base case scenario.