Wells Fargo raises its year-end S&P 500 target

Wells Fargo Investment Institute raised its year-end price target citing strong overseas growth and strong second-quarter earnings. The new forecast still calls for lower prices from here.

"Earlier this year, we had concerns that investors might fret over potential for a 2018 pickup in inflation and interest rates," wrote Paul Christopher, Wells Fargo's head global market strategist. "But our new (and more moderate) inflation expectations imply less downside than we previously had anticipated."

Christopher raised the target to a range of 2,300 to 2,400, up from its prior range of 2,230 to 2,330. The high end of the new forecast is about 1 percent below where the S&P 500 closed on Monday. Wells Fargo Investment Institute now sees S&P 500 EPS at $129, implying a 17.83 to 18.60 price-to-earnings ratio.

"We expect faster economic growth and low inflation in the second half to support continuing S&P 500 Index earnings growth," added the strategist, referring to the strong earnings numbers in the second quarter. However, "small-cap valuations remain stretched versus historical levels … We recommend investors remain evenweight mid caps and underweight small caps."

The strategist called bond-bubble fears overblown, adding that the 10-year Treasury yield could move modestly higher as the U.S. economy continues to expand and labor markets tighten.

"U.S. demographic trends are unlikely to change without a meaningful increase in new immigration — and debt levels are likely to deteriorate over the next decade," wrote Christopher. "So unless productivity-growth trends reverse, the 'Greenspan bond-bubble' fears are misplaced."

The revised range puts Wells Fargo Investment Institute just below the average forecast of Wall Street strategists. The median year-end target among top Wall Street firms is about 2,430, with Morgan Stanley's 2,700 forecast the highest and Fundstrat's 2,275 forecast the lowest.