Wall Street bull explains how stocks can rally another 10% from here through 2016 (SPX, SPY, DJI, IXIC, QQQ)

RBC’s Jonathan Golub — who was tied for top stock market bull at the beginning of this year — is out with another super-bullish forecast for the stock market in 2016.

That’s even after he recently reduced his 2015 price target on the S&P 500, and after other forecasts for modest returns.

To begin with, there should be a few key macro differences between this year and 2016.

“2015 was marked by falling oil prices, a diminishing global growth outlook, and flat rates,” Golub wrote to clients on Friday. “Our constructive 2016 outlook is predicated upon stabilizing commodity prices, and an incrementally higher dollar and rates. All of this should result in a substantially higher earnings trajectory as well as a modest re-rating of stocks.”

This different climate should help lift the S&P 500 to RBC’s year-end target of 2,300. That level would represent a 10% upside from Golub’s lowered year-end target of 2,100. The S&P 500 closed near 2,089 on Friday.

It would also mean that 2016 would bring a healthier return on the index. If the S&P 500 finishes this year near its current levels, it will have gained just 1.5% for the year, its lowest gain since 2008.

Golub is also bullish on earnings growth, and he sees earnings per share growing by 6.7% and 7% in 2016 and 2017 respectively.

The chart breaks down each of the contributions to this growth:

One of the biggest drags on earnings growth this year has been the energy sector, following the collapse of commodity prices, especially crude oil.

But this means companies have a lowered bar to clear next year to experience growth, provided oil prices do not plunge from current levels. This should support earnings growth for the sector and the overall S&P 500, according to Golub.

For the US economy, Golub notes that strategists have been too bullish on estimates of gross domestic product by about 3% in virtually every year during this recovery. In hindsight, however, it’s clear that many developed economies are not experiencing the same growth rates as they were before the most recent financial crisis.

And so Golub notes that consensus expectations are for modest growth by 2.5% for both 2016 and 2017, which would still be higher than the projected 2.1% growth rate this year and the highest since 2010.

“Our work,” Golub said, “indicates that S&P 500 revenue growth tends to mimic the overall direction of the economy.”

SEE ALSO: EL-ERIAN: The market is diverging, and it can be explained by 2 powerful price-setters

Join the conversation about this story »

NOW WATCH: The truth about those crazy calendar trends stock market gurus always talk about

from WordPress http://ift.tt/1YyVsOy