Can the Stock Market Climb Higher? Here’s What Wells Fargo Thinks.

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The stock- market rally has been too strong to ignore, and corporate profits are exploding, prompting strategists at both Wells Fargo and UBS to take upbeat views of the outlook for the

S&P 500.

Some rallies may be worrisome, but this one seems convincing to market watchers.  

Wells Fargo’s strategists lifted their year-end target for the broad market to 4825 from 3800, partly because the market’s recent rally has lifted the S&P 500 to a gain of a bit more than 19%, to 4486.27, so far in 2021. According to Wells Fargo, the index has risen by double digits in the first eight months of a year nine times since 1990. The average return for the following four months was 8.4%, which would bring the index roughly to the level Wells Fargo expects. 

Strategists at UBS set a price target of 5000 for the end of 2022. They aren’t discouraged by the fact that the S&P 500 has doubled since it hit bottom in 2020. “Yes, the rally off the COVID-19 bottom in March 2020 has been extraordinary, but we think there are further gains ahead,” writes David Lefkowitz, head of equities for the Americas at UBS.  

The fundamental factor behind the boosts to both firms’ price targets is the likelihood that earnings will grow. 

Wells Fargo noted that analysts have become increasingly upbeat, boosting their estimates of corporate profits by almost 8% each quarter, as companies benefiting from a snapback in consumer demand handily beat forecasts for their earnings. “The trend shows no sign of abating,” writes Christopher Harvey, Wells Fargo’s chief U.S. equity strategist, 

Wells Fargo now expects aggregate 2021 earnings per share of $211 for companies in the index, given that EPS in the second quarter was $52.10. The consensus call among analysts tracked by FactSet, meanwhile, is for 2021 EPS of $199. The Wells Fargo strategists see EPS rising another 12% to $238 in 2022, above analysts’ call for $217.  

Valuations should fall a bit, the bank says, but not enough to derail the rally. The strategists foresee the average stock on the S&P 500 trading at 20 times the per-share earnings projected for 2022, just under the current multiple of 21. Harvey says the Federal Reserve is expected to reduce economic support, which would likely bring interest rates higher and reduce the current value of future profits.

UBS also sees earnings helping to lift stocks despite a modest drop in valuations. Lefkowitz…