With stocks at all-time highs, one of Wall Street’s biggest bulls is increasing optimism.
Federated Hermes’ Phil Orlando believes the S&P 500 could hit its year-end price target of 4,500 by July, up about 8% from current levels.
“As the economy grows and profits grow, you know we may get there sooner,” the company’s chief equity markets strategist told CNBC’s Trading Nation on Friday.
Last week, Orlando’s company raised its GDP forecast for the year to 6.4%, citing the positive impact of President Joe Biden’s $ 1.9 trillion coronavirus relief package. Federated came into the year with a forecast of 6.1%.
“If we are correct in our estimate of 6.4%, this will be the strongest full-year GDP growth since 1984. We achieved a rate of 7.2%,” said Orlando.
The upgrade takes place when the winning season is in full swing. So far, Orlando likes what he sees.
“First quarter earnings are very strong. It looks like we could be up 30% year over year. The earnings recession is over,” said Orlando. “In the second quarter, when some of these fiscal stimuli are fully exploited, we could expect earnings growth to double year-over-year.”
There is a catch to his optimism, however: Orlando is concerned about the second half of the year due to a lack of clarity about the future of an infrastructure package and inflation. He believes the risks are weighing on stocks and could trigger a correction.
“The question is when do we get to the end of summer, and we’re looking at a core PCE, for example [personal consumption expenditures price index] that’s around 2.5%, does it plateau and then start to normalize? Do you know is it temporary in Fedspeak? Or have we started sowing the seeds for a more sustainable rise in inflation? We don’t know the answer to that right now, “said Orlando.
If inflation proves permanent, he wonders if the Federal Reserve will adjust its easy money policy over the course of 2021.
“These are important questions,” he said. “Right now we just have to watch and wait and make our best judgment later in the year.”
Currently, Orlando, which manages more than $ 619 billion in assets, is not taking big strides. He is sticking to a game book that is supposed to benefit from the reopening of the economy and a monster market year.
His top favorites include financials, energy, consumer discretionary, industrials, small caps and international stocks with a focus on emerging markets.
“These categories have outperformed growth and technology since the last day of work,” Orlando said. “We believe trading has legs and will continue through this year’s balance sheet – probably well into the early stages of next year.”
CNBC’s Robert Hum contributed to this report.
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