/The Tell: ‘Smart-money’ investors haven’t been this bullish on stocks since 2018, says RBC survey

The Tell: ‘Smart-money’ investors haven’t been this bullish on stocks since 2018, says RBC survey


Even as the spread of COVID-19 accelerates in many regions of the U.S., institutional investors are becoming ever more bullish about the prospects for the stock market, according to a survey released this week by RBC Capital Markets.

“Our respondents are highly bullish on stocks, the most optimistic they’ve been since we started our survey in the first quarter of 2018,” wrote Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.


RBC Capital Markets

She said that the survey respondents provided three reasons for optimism, including attractive valuations, faith in the Federal Reserve to take actions necessary to support the economy and “a belief that the economic damage from the public health crisis will be manageable.”

The survey, which gauged the opinions of 185 institutional investors during the week ended Tuesday, showed that most respondents don’t believe the stock market has yet hit a bottom, but more than two-thirds believe the S&P 500 index
SPX,
-1.51%

will hit its lowest point above the 2,100 level, or 8.8% below the March 23 closing low of 2,304. More than half say that the index will trough during in the next three months, before heading higher.

Meanwhile, 78% of respondents said that “a decline in new coronavirus cases is needed for the equity market to stabilize,” indicating that most do believe that decline will begin before the end of June. A majority of respondents said they believe “business life will go back to normal” before the end of September.

The ultimate impact of the virus on corporate profits is a key question for investors and projections for S&P 500 earnings-per-share are “scattered” Calvasina wrote, but the average buy-side expectation is for 2020 EPS to come in at $130, a 22% decline from last year’s $165, before rebounding to $158 in 2021.

While this hit to corporate profits is expected to be significant, stock prices have fallen so far that bulls paint an optimistic picture even with these depressed earnings. During the second half of this year, investors will begin to look to 2021 earnings to price the market. Earnings per share of $158 can justify the S&P 500 trading at 2,639 if the market trades 16.7 times earnings, the average multiple during the past five years, according to FactSet.

Given that roughly half of respondents believe the Fed will continue to keep interest rates near zero and maintain its program of bond buying into next year, a significantly higher multiple could be justified. If the S&P 500 were to return to its pre-crisis multiple of around 19 times earnings, the S&P 500 could be trade around 3,000, based on $158 in 2021 earnings, or a 21.5% increase from Wednesday’s close.

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