Deutsche Bank Sees Solid Q4 Earnings, Says 'Wait for Dips' in S&P 500

In a report published Sunday, Deutsche Bank Markets Research Strategist David Bianco reviewed U.S. Equity Insights.

In 2013, the S&P 500 was up 29.5%, 75% on PE and 25% on EPS. The S&P delivered a 32.4% total return, its fifth best year since 1960. Bianco expects the S&P to reach 2000, but noted that this is more likely to hit in 2015 then the 2014. Deutsche Bank reiterated its 2014 end target of 1850.

The fourth quarter in 2013 was healthy, up 10% y/y and approximately 3.5% above $28.05 btm-up EPS. The analyst wrote, "Despite the furor over record number of companies giving negative guidance for the 4Q, macro data and bottom-up EPS trends suggest that earnings should be healthy and show EPS growth gaining further momentum in 2014. Key macro indicators like US and global manufacturing ISM, durable goods orders, industrial production, US exports corroborated with improvement in container data from US ports and increase in China imports were consistently better for 4Q. High oil and natural gas prices and FX also suggest good results." Bianco continued, "Facebook's addition to S&P was dilutive (FB's significantly higher PE) to EPS by $0.12 in 4Q and $0.50 in 2014. Yet, we will likely raise our 2014E to $120 unless big company specific disappointments. S&P 2013E end pension funding at 92%, $2 boost to 2014 EPS."

In 2014, Bianco expects normal EPS growth, PEs, total returns and volatility. The analyst noted that with normal volatility, investors can expect at least one 5-9.9% dip from the six-month high. Deutsche Bank analyzed three reasons for such a dip including the Fed changing policy, that PEs are greater than history, and mid-term elections.