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Credit Suisse revises year-end 2018 target for MSCI AC World higher
Credit Suisse's equity strategy team led by Andrew Garthwaite has marked-up its year-end 2018 target for the MSCI AC World index from 614 points to 628 points, despite the current "extreme" equity valuations on offer on an absolute basis.
For starters, the forecasting ability of valuations was scarce on a near-term basis, they said.
Furthermore, on the basis of their own projections for earnings per share growth, they estimated that, at roughly 5.3%, the so-called 'equity risk premium' was too high at present, when 3.5% was warranted.
Indeed, typically at bull market peaks it had fallen to 2.4%, they pointed out.
Among other factors, they also called attention to how the majority (80%) of bull markets since 1970 had topped-out when the rate of unemployment fell below the so-called NAIRU.
But on their estimates that rate now lay at 3.5%, not 4.6%.
"We would stress that those geographies which have tighter labour markets than the US have not seen wage growth pick up. The critical issue is when wage growth rises above 3.5% (2.6% currently)," they added.
As well, over the past 50 years all bear markets had coincided with an economic recession, but for now the modelled recession probabilities remained very low, the strategists said.
"The sector that has led the market is not expensive (tech's P/E relative is close to average). Tech is the defining characteristic of this cycle," they added.
On the subject of the upcoming Federal Reserve policy meeting, Credit Suisse said it would worry if the term "gradual" was dropped from the FOMC's statement or if rate-setters revised their estimate of 'r-star' higher than that for potential growth.
"Our tactical indicators gave a sell signal in late January, but this was driven by sentiment surveys, and funds flow has not followed sentiment. Volatility usually picks up more ahead of a market peak."