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Market Preview: Crossing the Canyon

 

NEW YORK ( TheStreet) -- There's likely weeks of posturing in between now and then but most market watchers are expecting the politicians will be able to hammer out a budget compromise and avoid the fiscal cliff.

Deutsche Bank, for one, is recasting the cliff as a canyon and the firm outlined its scenario for a strong run for the S&P 500 in 2013 in research on Thursday.

"Given the election results -- which raised the risk of higher taxes, especially on dividends -- we consider the S&P 500 at 1400 fair until clarity emerges on new legislation that mitigates the fiscal cliff," said analyst David Bianco Thursday in a note to clients. "If this legislation reduces 2013 fiscal drag to 1.5% or less and the top tax rate hikes from what is scheduled, then the S&P 500 should rally to 1500 in early 2013 and put 1600 well within reach for 2013 end. Thus, we see 2012's year-end fiscal cliff as being more of a canyon with attractive S&P returns on the other side."

Depending on the Republicans and Democrats to get on the same page is a recipe for choppy trading but Bianco is confident they'll eventually see the light.

"It is distressing that building a bridge over this canyon is in the hands of politicians, but the means (deficit is falling) to find compromise exist and eventually so too the will," he said. "For the holiday season, we find the reward/risk on the overall S&P 500 attractive and compelling at Tech and Industrials."

Deutsche Bank's 12-month target for the S&P 500 is 1500, a level that would be an easy hurdle with only "modest" expansion of the index's valuation.

"We think modest PE expansion to 14-15 trailing EPS can be driven by: 1) EPS proving resilient with ~5% EPS growth in 2013, 2) continued buybacks and share count shrinkage, 3) further ramp-up in acquisitions with corporate re-leveraging. PE expansion to 15 or higher is possible, but it will likely require pro growth US tax policy," Bianco said.

As for Friday's scheduled news, it's a light day with the earnings calendar featuring Genesco (GCO), Johnson Outdoors (JOUT), and United Natural Foods (UNFI).

The economic calendar includes personal income, spending and the core PCE personal consumption expenditure inflation data for October at 8:30 a.m. ET; as well as the Chicago purchasing managers index for November at 9:45 a.m. ET.

Thursday's after-hours movers included Zynga (ZNGA), which fell more than 12% after the company and Facebook (FB) modified the terms of their partnership; and Zumiez (ZUMZ), which tumbled after giving a disappointing outlook.

-- Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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