We believe investors should be structurally overweight equities. We raise our year-end target MSCI ex US to 293 from 288 (4% potential upside) and end-2021 target to 317 from 303 (12% potential upside). There are eight main reasons for being overweight:

Policy. Our aggregate policy indicator (monetary, fiscal, corporate lending and US dollar) is twice as loose as levels seen at the peak of the GFC. We believe policy remains very loose, allowing more of a V-shaped recovery (hence, pre-pandemic levels of GDP are restored by mid-2022). The key supports are: i) the extension of fiscal easing/furlough schemes in Europe; ii) the very limited tightening of lending/credit conditions; iii) the Fed being very dovish; iv) the recent fall in US bankruptcies; and v) little apparent likelihood of a widespread second lockdown (with the number of deaths falling sharply relative to infections in both Europe and the US). Policy should lead to inflation expectations rising to c3%, which should allow the TIPS yield to fall to c-2.5% and the debt to be inflated away.

Global PMIs can rise. ISM new orders, global macro surprises and global IP growth momentum (3m/3m) are close to all-time highs, but critically global PMI new orders are mid-range and are consistent with only 2.6% of global GDP growth (our economists forecast 3.5% GDP growth for 2H 2020). Hence, we think PMIs can rise despite macro surprises falling. Markets generally have been up or flat on all occasions when PMIs rise but macro surprises fall. Both cyclicals and risk appetite are pricing in a sharp fall in PMI/ISM.

The ERP looks 2% too high. ERP is 7.1% on our EPS numbers, even assuming a fall in PMIs; it should be c4.8%, giving c.4,100 on the S&P 500 by end-2021. We think fair value P/E for S&P is 22x.