Need to Know: There’s too much enthusiasm in the market, this strategist says — but he’s still optimistic about stocks next year

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With the 30th record close for the S&P 500 on Tuesday, and the 50th record finish for the Nasdaq Composite, it isn’t hard to find market observers who think the stock market is getting just a little carried away.

“Still a little too much enthusiasm in an otherwise healthy environment,” said Tony Dwyer, the New York-based strategist for Canadian brokerage Canaccord Genuity, in a note to clients. “We believe the combination of extreme bullishness, broad acceptance of the economic recovery rotation, and a historic ramp in our favored areas have us looking for a near-term pause in the upside.”

He said that early next year, the economy may stall due to the second wave of coronavirus globally.

But Dwyer is still very optimistic about next year, and his optimism is that the rug won’t be pulled out from the recovery after this recession, as it was last time. “We believe both the economy and market are in the early stages of a new cycle, and unlike the great financial crisis recovery, this one should not be dampened by an onerous regulatory reserve backdrop for financials or fear of a quick reversal by the Fed as the economy shows signs of improved growth,” he said.

By February 2010, Dwyer pointed out, big banks were already adding to reserves, and the Federal Reserve had already begun removing accommodation. This time around, the Fed is promising not only to keep interest rates pinned at zero and quantitative-easing measures in place until after inflation reaches 2%.

There is also the possibility of more fiscal stimulus. More on that later.

Dwyer points to a third factor behind his optimism — the corporate refinance cycle. Companies may be able to save 20% of their current coupon interest expense, or some $73 billion in total. That could boost next year’s earnings, by that factor alone, by 4%. Dwyer, as a result, lifted his S&P 500 earnings-per-share estimate for 2021 to what he called a “very conservative” $176, up from $165.

He calls valuation targets “useless” in an era of zero interest rates and unlimited quantitative easing, though the bottom valuation should be 20 times earnings, the historic average with core inflation between 1% and 3%. That implies a floor of 3,520 for the S&P 500 SPX, which closed on Tuesday at 3,702.25. In an email, Dwyer added that the concentration of the companies that drive the S&P 500 also is a reason he no longer provides S&P 500 targets.

“EPS are going higher, and the conditions remain in place for multiple expansion,” he said.

The buzz

Treasury Secretary Steven Mnuchin said he has put forward a $916 billion stimulus proposal in a negotiation with House Speaker Nancy Pelosi. Pelosi welcomed the proposal but said parts were still unacceptable.

The United Arab Emirates said a study of a vaccine made by China’s Sinopharm HK:1099found it was 86% effective. Passengers on a Royal Caribbean RCL “cruise to nowhere” in Singapore were being held on the ship after someone contracted COVID-19.

U.K. Prime Minister Boris Johnson is due to have dinner with European Commission President Ursula von der Leyen, as the two sides attempt to reach a trade deal. The U.K. also said it will suspend retaliatory tariffs against the U.S. levied as part of the Airbus-Boeing dispute. Meanwhile, Poland’s deputy prime minister said a European Union budget deal should be reached by Friday.

DoorDash DASH priced its initial public offering at $102 per share, which was above the $90 to $95 range that the food delivery service initially sought.

Cybersecurity company FireEye FEYE said sophisticated hackers accessed its tools used to test its customers’ security. The New York Times reported the hackers were likely Russian intelligence agencies.

SoftBank JP:9984 rose in Tokyo trade, on a Bloomberg News report that the investment group was considering a gradual buyout of its outstanding shares.

JPMorgan Chase JPM Chief Executive Jamie Dimon said there “may be a bubble in small parts of the stock market” but said he wouldn’t touch Treasury bonds “with a 10-foot pole.”

The markets

The Mnuchin stimulus offer put markets in a positive mood. U.S. stock futures ES00NQ00 were mostly higher, while gold GCZ20 fell. The yield on the 10-year Treasury BX:TMUBMUSD10Ycrept up to 0.94%.

The pound GBPUSD rose ahead of the Johnson-von der Leyen dinner.

Chart of the day

Drawn from an academic study, this chart shows the performance of hired asset managers by asset class — showing pension funds aren’t good at picking managers. They either chase asset managers who are hot or ones their consultants have personal relationships with. “It is simply impressive how pervasive the lack of skill in picking asset managers is,” says Joachim Klement, strategist at U.K. broker Liberum Capital.

Random reads

Is Mount Everest growing? Nepal and China have agreed to set the peak at a new, increased height.

Granted, they have a small vocabulary and are easily confused, but dogs do have some idea of what you’re saying.

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