After a volatile couple of months, one of the biggest bulls on Wall Street believes he hasn’t been bullish enough in this market.
“I think I’m a little too conservative. I’ve probably got to raise my number,” Tony Dwyer, chief market strategist at Canaccord Genuity, told CNBC’s “Trading Nation” on Monday.
Strong earnings forecasts for this year and accelerating growth in the U.S. and global economies have Dwyer reconsidering his year-end price target on the S&P 500. He had set a target of 3,100, one of the highest on the Street and above the median of 3,000.
“You’ve had a 10 percent drop as of Friday’s close, and you’re going to have 20 percent earnings growth this year. That’s one heck of a multiple compression on forward numbers,” said Dwyer.
“You’d really have to have a significantly negative move here economically relative to expectations into the end of the year to disappoint that number because of the tax cuts and just the global recovery and what’s happening in capital spending and consumption in the U.S.,” he continued.
S&P 500 companies should post 20 percent earnings growth over 2018, according to his forecasts. On that pace of growth, the S&P 500 currently trades at 17 times forward earnings.
“When core inflation is between 1 and 3 percent, the market trades at a 19 multiple. So at a 17 multiple, you want to be a buyer of stocks,” said Dwyer.
Trading multiples have eased since the beginning of the year after sell-off waves in early February and March. The S&P 500 began the year trading at 18.3 times forward earnings. After Friday’s sell-off, the index is trading closer to a 16 multiple.
Sell-offs could continue for a stretch longer as some of the feverish enthusiasm that pushed markets to January highs fades, according to Dwyer. A return to volatility, he says, has presented bullish investors with an opportunity.
“The first half of 2018 is going to be a very volatile year without a lot of progress where you get a lot of whooshes, which means sharp, ‘oh my God’ kind of sell-offs, and ramps,” he said. “We want to add to exposure as you get a whoosh because the fundamental backdrop is terrific, and maybe not try to chase some of the real ramps that we get.”
Even the flattening of the yield curve, a point of concern for some analysts, is not a major hurdle to Dwyer’s market forecasts. According to his calculations, even if the yield curve were to invert tomorrow, the S&P 500 historically sees another 21 percent gain over the 18 months or so afterward.
Even if you get “an inversion of the yield curve which is what drives recession expectations, you still have plus-20 percent over the course of almost two years,” said Dwyer. “If you weight that to just the last three cycles, it’s more significant, it’s longer in duration and higher in median gain.”
The yield curve inverts when yields on shorter-term bond maturities rise above yields on longer-term maturities. The 10 year-2 year Treasury yield spread was at 55 basis points on Monday.