S&P 500 To Hit 2800 In 2018? Play These ETFs

Stocks have seen an impressive rally this year thanks to Trump’s win on hopes of fiscal reflation and several upbeat U.S. economic data points. The S&P 500-based ETF (AX:SPY) has added 15.3%, the Dow Jones Industrial Average-based fund (V:DIA) has advanced more than 18.8% while Nasdaq-100 based QQQ has tacked on 30.1% gains (as of Nov 21, 2017) this year.

Trump’s pledges for fiscal reflation, corporate tax and deregulation have led Vanguard 500 ETF VOO to haul in about $13.3 billion and iShares Core S&P 500 IVV to amass about $28.8 billion, this year.

More Gains or Correction Ahead for the S&P 500?

After gaining such heights in a year, concerns over momentum loss or profit booking is quite expected at the current level. This is especially true given the prevailing confusion over the seamless passing of the much-awaited tax bill.

But several investment banks and research houses came up with an upbeat outlook for the S&P 500. David Kostin and the equity strategy team at Goldman Sachs (NYSE:GS) expect the S&P 500 to surge 11% in 2018 to hit 2,850 by the year-end, up 9.7% from the close of Nov 21, 2017. Goldman believes that the S&P 500 earnings may shoot up 14% in 2018 if the tax reform is passed. Presently, there is around 80% chance of it being cleared by early next year, as per Goldman (read: House Passes Tax Bill: Likely ETF Winners & Losers).

BMO Capital’s Brian Belski sees the S&P spurting higher to2,950 by the end of 2018 in his base case scenario. UBS’s Keith Parker expects the S&P 500 to exit 2018 at 2,900 even without tax cut enactment. Parker believes that the market will roar even higher if the bill sees the day of light. Deutsche Bank’s Binky Chadha shares the same view and sees the S&P touching 2,850. Credit Suisse (SIX:CSGN) views the S&P 500 at 2,875 at 2018-end.

What’s Causing This Bullishness?

Upbeat corporate earnings have been instrumental in driving the S&P 500. Gone are the days when the Fed’s ultra-easy money policy acted as the key driver of the market rally. The Fed is now tightening its policies while the market is hoping for fiscal expansion. Plus, earnings momentum has been solid. Oil prices are showing signs of a recovery on the OPEC output cut deal, though continued uptrend is less likely on rising U.S. shale oil production (read: Is It Time to Buy the Dip in Crude & Energy ETFs?).

As per the Earnings Trends issued on Nov 16, 2017, the S&P 500 is expected to see a 6.5% rise in earnings in Q3 on 5.8% higher revenues. Now onward, earnings growth momentum will gather steam. As of now, the projection for Q4, 1Q18, 2Q18 and 3Q18 is 8.7%, 9.1%, 9.1% and 10.0%, respectively, on 6.5%, 6.6%, 5.7% and 4.6% higher revenues (read: Earnings or Revenue-Weighted ETFs: Q3 Winners).

As far as Fed tightening is concerned, the current level of benchmark treasury bond yields is not concerning, if we go by Credit Suisse’ analysis. As per credit Suisse, “P/Es have historically moved higher until the 10-year Treasury reaches 5%.”
However, their research also indicates that this “tipping point” has probably declined to 3 1⁄2%, given the ongoing slower-growth environment. Whatever the case, with 10-year benchmark bond yields at 2.36% (on Nov 21, 2017), a trend of rising P/E could probably be seen.

Leveraged ETFs to Play

Given this, the S&P 500 will likely see solid trading ahead and investors could easily tap this opportune moment by going long on the index. There are a number of leveraged inverse products in the market that offer multiple (2x or 3x) exposure to the index. Below we highlight some of these ETFs.

ProShares Ultra S&P500 (NYSE:SSO) ETF SSO

The fund seeks to deliver twice the returns of the index, charging investors 0.89% in expense ratio.

Direxion Daily S&P 500 Bull 1.25x Shares LLSP

This ETF offers 125% exposure to the S&P 500 Index and is the cheapest in the large-cap leveraged space, charging just 25 bps in annual fees.

Direxion Daily S&P 500 Bull 2x Shares SPUU

This product also provides two times (2x) exposure to the index, charging a lower fee of 60 bps.

ProShares UltraPro S&P500 ETF UPRO

Investors having a more bullish view and a higher risk appetite could find UPRO interesting as the fund provides three times (3x) exposure to the index. The fund charges a slightly higher fee of 94 bps per year.

Direxion Daily S&P 500 Bull 3x Shares SPXL

This fund offers a triple leveraged long position on the S&P 500 Index while charging 95 bps in fees a year.

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