U.S. GDP growth is expected to be greater than 3% this summer, which would mark the end of a run of mid-year soft patches and potentially open the door for a longer period of growth in the 3% range.
If the 10-year U.S. treasury yield can stay under 3.25% this summer against the backdrop of stronger growth, Deutsche Bank strategist David Bianco said it is unlikely that the yield will exceed 4% through 2015.
“This improved clarity on low yields through the cycle should put the S&P 500 on path to 2,000 within 12 months,” he told clients.
In addition to forecasting this gain of roughly 8%, Mr. Bianco outlined three reasons to wait for a dip in equity markets while watching yields this summer.
PEs are higher than normal
The S&P 500′s trailing P/E of 17 is approximately 5% higher than its average since 1960, while long-term EPS growth is expected to be in line with history.
Some low PE mega-caps are still attractive,” the strategist said, noting the median P/E of 18 is also about 10% higher than its historical average “and is dependent on low interest rates persisting through the cycle.”
Interest rate volatility may rise
Since 1966, the 10-year yield has risen by 50 basis points or more in three months at least once every year. Mr. Bianco also noted the 10-year jumped 100 basis points during the “taper tizzy” in 2013.
Interest rate volatility is likely to be higher this summer if the acceleration changes Fed guidance or investor expectations on the trajectory of the Fed Funds rate,” he said.
The summer lull is worse in mid-term election years
Excluding recession years, the S&P 500 gains an average of 3.9% from January to April., 0.9% from May to September, and 4.4% from October to December.During mid-term election years, May to September is usually weaker, averaging a decline of 6.4%, and October to December is stronger with an average gain of 6.7%.
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