The most optimistic investment bank on Wall Street has emerged! Deutsche Bank predicts: S&P 500 to reach 5,100 points by the end of next year.

In recent weeks, the optimistic sentiment of the continuous cooling of US inflation has further led the market to bet that the Federal Reserve will start a rate-cutting cycle in the first half of next year. The three major US stock indexes have risen for four consecutive weeks, and US bond yields have fallen sharply.

While Wall Street is calling for the "Christmas rally" of the S&P 500 to begin, the outlook for the index's rise next year is also growing.

On November 27th, Binky Chadha, a US stock analyst at Deutsche Bank, predicted in a report that the S&P 500 index will reach 5,100 points by the end of 2024, which means an increase of about 12% from last week's closing point. Deutsche Bank believes that even if the US may experience a mild and short-lived recession, corporate profits will still remain resilient.

Compared with Deutsche Bank's optimism, Goldman Sachs and Societe Generale's forecasts are slightly more cautious. Goldman Sachs expects the S&P 500 to rise to 4,700 points next year, an increase of 3.3% from Monday's closing. Strategists at Bank of America and Royal Bank of Canada predict that the S&P 500 index will reach 5,000 points by 2024, an increase of 10% from the current level.

Mike Wilson, a long-term pessimist and analyst at Morgan Stanley, has also gradually become optimistic about the US stock market next year. Although Wilson believes that the recent momentum of the US stock market's rise is weakening, he still expects the S&P 500 to maintain around 4,500 points by 2024, roughly the same as the current level.

Media analysis points out that compared with the performance of the US stock market in recent years, a 12% increase is not "exaggerated". It is worth noting that the S&P 500 rose by 27% for the whole year of 2021, and the increase is expected to reach 19% this year. However, it should be noted that Deutsche Bank analysts made the above predictions under the assumption of a mild recession in the US economy next year.

Deutsche Bank strategists predict that if the US economy experiences a mild and short-lived recession, corporate profits will grow by 10%. If US Gross Domestic Product (GDP) grows by 2%, corporate profits will grow by 19%:

"If profit growth continues to recover as we expect, valuations will continue to be well supported near the top of the range, which is typical pricing for accelerating profit growth."

Deutsche Bank pointed out in the report that the stock market is still closely watching the unstable macroeconomic outlook. For more than a year, economists have unanimously believed that US economic growth will sharply slow down, but the unexpectedly strong resilience of the US economy has repeatedly delayed expectations of an economic slowdown. It is expected that the US economy will experience a mild recession in the first half of next year:

"We expect real GDP in the US to decline by about 0.6% in the first half of 2024, and the unemployment rate will be slightly above 4.5%.

We expect the main reason for the economic downturn to be a decline in consumer spending. US households will face the impact of slowing growth in disposable income, reduced savings, repayment of student debt, and tightening credit conditions. The recent increase in credit card and auto loan delinquency rates proves that these unfavorable factors are affecting the economy." Chadha believes that although people have been cautious about the prospects of the US economy, company profits are steadily increasing. According to expectations that the US economy will experience a mild recession in the first half of next year, the basic forecast for earnings per share is $250, which will drive the S&P 500 to rise to 5100 points. If there is no recession, earnings per share will reach $271, and the S&P 500 will rise to 5500 points:

The earnings per share of the constituents of the S&P 500 index will decline in the second half of 2022, bottom out in the fourth quarter, and steadily increase in 2023, reaching a new high in the third quarter. However, due to relatively low year-on-year growth, the level of earnings in the past twelve months, and uncertainty about the macroeconomic outlook, people's views remain cautious.

In the case of a mild short-term recession in the US economy, earnings per share are expected to be $250 (a 10% increase). If the economy maintains a 2% growth trend, earnings per share will be $271 (a 19% increase), and the S&P 500 index will reach 5500 points.

We believe that the current valuation level is not high. If the US inflation rate returns to 2%, the current price-to-earnings ratio valuation range of the S&P 500 index is 16-20 times, with a fair value of 18 times. If earnings continue to recover, the valuation will be supported at the top of the range.

If there is an economic slowdown or recession as widely expected, the stock market will experience a small and short-lived sell-off.

Deutsche Bank maintains a neutral stance on large-cap tech stocks, as the relatively high earnings growth is already reflected in the high valuations, and remains overweight on the financial and consumer cyclical sectors:

We believe that the valuation of large-cap tech stocks is too high, while we remain overweight on the financial and consumer cyclical sectors as they have already been priced for an economic downturn and are the biggest beneficiaries of the eventual recovery.

In the period of economic upturn and a weakening US dollar, we are overweight on the materials sector. For the industrial sector, we maintain a neutral stance as they have benefited from industrial policies.

For the energy sector, we maintain a neutral stance as the oil price is far above our fair value measurement, and there are still issues regarding energy transition policies, the oil-dollar cycle, and financial discipline sustainability. When recession concerns accompany a decline in bond yields, we will continue to have a low allocation to defensive sectors.