Stocks appear priced-to-perfection with a narrow margin of error, but low interest rates and an improving economy will push equities higher the rest of the year, said Eric Wiegand, senior portfolio manager U.S. Bank . “Our underlying premise has been and continues to be that an improving economy, both home and abroad, is required to drive earnings, which ultimately is required to support higher stock prices,” said Wiegand. Wiegand’s published end-2016 price target for the S&P 500, now at 2,143, is 2,225, or 19.0 times his EPS estimate of $117.00, within a low-high range of 1,900 to 2,300. He said valuations are high when compared to historical norms, yet short of extremes with the S&P 500 trading at roughly 18.5 and 20.5 times estimated 2016 and trailing 12-month estimates. Valuations can stay elevated for the foreseeable future in a low interest rate global environment, in his view. Wiegand said sentiment is mixed, generally bolstered by firming wages, a stable housing market, low core inflation, low energy prices and rising consumer net worth, while on the flip side, manufacturing is generally soft, teetering between expansion and contraction. He added his favorite sectors are information technology and healthcare because they have “favorable growth and demographics in their favor.” While Wiegand’s outlook for equities remains constructive, he said the near-term, risk profile of equities remains elevated due to seasonality. Dating back to 1945, September is the worst performing month declining on average 66 bps and having fallen 57% of the time in September. Another risk to Wiegand’s outlook is that higher wages increase margin pressure resulting in a drag on earnings growth. As for the Federal Reserve taking the market off-track, Wiegand concludes that the central bank will be on hold, albeit a “hawkish tone.”
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