Please see the attached two pieces. The first, Why the market has further to rise, is an update of our market view. We remain constructive and have revised up our profit growth forecast for 2010 to 40% for the whole market which would put the P/E for 2010 just 10x. We upgrade our year end target to 260 from 235 for the DJ Stoxx 600 and forecast 275 over 12 months. We remain broadly cyclical in our sector stance. The second piece, Explaining our earnings forecasts, is a more detailed Q&A on our earnings forecasts.
With the market up 50% from lows, many question the potential from here. As we move from a 2nd derivative improvement in activity to a 1st, we expect slower returns. But based on recent GDP revisions and higher earnings forecasts, we upgrade our DJ Stoxx 600 year-end target to 260 (from 235) and maintain a cyclical bias.
Tracking previous recoveries
Following the 50% rebound since March, many argue that there is little upside for the market from here. While we agree that the market tends to make its strongest returns while the economy is still contracting, albeit at a slowing rate (an improving 2nd derivative), it tends to make further gains as the economy begins to expand (the 1st derivative). Furthermore, the sharp recovery is not unique given the depth of the declines over the past two years and the market remains 25% below the pre-Lehman levels while our financial stress index is back to pre-September 2008 levels.
Valuation and earnings upgrades support higher returns
We have upgraded our European and global GDP forecasts recently and now expect 4% global GDP growth in 2010, well above consensus. This, coupled with higher financials earnings, has resulted in a further rise in our top down profit forecasts. We now expect net income growth pre-exceptionals of -16% for 2009 (-23% ex financials) and +40% for 2010 (+37% ex financials). This puts the market on 10x 2010 earnings on our forecasts. We upgrade our year-end DJ Stoxx 600 target to 260 (from 235) and have a 12-month target of 275.
