The size of the expected gains varies across Wall Street with Bank of America seeing a 1.8% increase, Morgan Stanley forecasting a 4.5% return and Goldman Sachs forecasting a 15% advance.
“We remain bullish on the U.S. equity market and expected the average stock to perform better than the index,” said Morgan Stanley equity strategist Michael Wilson. “This is typical during the recovery phase when earnings drive stocks rather than the multiple.”
A continued rebound in economic growth will fuel strong topline growth while cost cutting helps boost margins, he said, noting a “broadening of market performance away from structural growth” will help propel the S&P 500 to his 2021 year-end target of 3,900.
The five mega-cap technology stocks -- Apple, Microsoft, Amazon, Google and Facebook -- make up 22% of the S&P 500 and have returned about 48% this year compared to just a 4% return from the remaining 495 companies, according to Goldman Sachs.
Strategists at the firm believe the stock market can still succeed in an environment where those stocks underperform next year. They say the benchmark S&P 500 could reach their 4,300 target should those five stocks gain just 5% next year should the remaining stocks average 20%.
A “barbell strategy” made up of both tactical positions in deep value stocks and long-term holdings of secular growth stocks is the best way to play the market next year, the Goldman strategists said.
Not everyone on Wall Street is expecting the S&P 500 to see strong gains in the year ahead.
“A lot of optimism is priced in already on vaccine/recovery,” wrote Savita Subramanian, equity and quant strategist at Bank of America. Her 2021 year-end target for the S&P 500 is 3,800.
Subramanian noted vaccine execution and longer lockdowns are among the risks stocks will encounter next year.