Investors continued to sweep away those inflation worries at the start of the week, sending the S&P 500 SPX, +0.18%, and the Nasdaq Composite COMP, +0.74% to fresh highs. That’s a decent feat for the latter, which last hit a record on April 26. Markets simply believe it is too soon for a Federal Reserve taper, as the central bank’s two-day meeting kicks off Tuesday. According to Bank of America’s latest monthly fund manager survey, 72% are buying the Fed’s line that inflation is transitory.
That doesn’t mean some investors aren’t still worried about this, that, and the other. Our call of the day comes from Credit Suisse’s chief U.S. equity strategist Jonathan Golub, who offers reasons to stay bullish.
“Surprisingly, we find investors more bearish as inflation readings and declining yields dominate conversations,” he said in a note to clients that published on Monday. “Despite these issues, we remain comfortable with our 4600 [S&P 500 SPX, +0.18%] year-end price target, which implies 8.3% upside.”
Inflation readings such as last weeks on consumer prices and higher commodity prices could begin putting profit margins under pressure. “Our work indicates that companies are experiencing substantial pricing power which should lead to greater profitability despite higher input costs,” countered Golub.
Signs of declining bond yields in the face of higher prices could mean stagflation is looming. That is unlikely, with inflation largely seen as transitory and 10-year Treasury yield rate declines modest (5-year range 0.5% to 3.2%), said Golub.
Economic surprises have steadily fallen since mid-July, but the market keeps going up. Economic activity has improved during this time, and that is the “true catalyst of the S&P 500’s advance,” the strategist argued.
S&P 500 Long (Buy)
Enter at: 4260.01