In part one of this series, I explained why five likely events in 2021 are likely to drive an impressive rally in stocks, which can make smart investors a fortune. Just how powerful a rally are we talking about?

In a client note published Wednesday, Goldman said stronger-than-expected third-quarter earnings, a divided Congress that leaves little scope for major legislative changes, and the impact of the Pfizer vaccine, has allowed for an improved year-end point target of 3,700 for the S&P 500, which the bank says will be followed-up by a 16% gain in 2021 and a further 7% advance in 2022 that will take the U.S. benchmark to 4,600 points by the end of 2022.” – thestreet.com

Goldman Sachs (GS) is one of the 16 blue-chip economists, the most accurate forecasters out of 45 tracked by MarketWatch.

While I can’t tell you whether their expectations of 4,100 on the S&P 500 by the end of next year is likely, much less the 4,600 they expect by the end of 2022, here are two reasons why those predictions of a 27% rally over the next 25 months may be reasonable. More importantly, Goldman’s note has within it the secrets to making far more impressive short-term gains, among the safest and highest quality dividend blue-chips in the world.

2021 Earnings Growth: Boom Times For Corporate America

(Source: FactSet Research)

The FactSet consensus is for 22% EPS growth next year, and the Reuters’/Refiniv consensus is similarly impressive.

While not as impressive as 22% EPS growth in 2021, Reuters’ expects almost 16% more EPS growth in 2022. That would be the two best years of earnings growth since 2018, a year when earnings grew by almost 23% thanks to corporate tax cuts.

Now I should point out that Goldman’s 4,600 S&P forecast for 2022 won’t be entirely justified by this strong earnings growth bonanza.

S&P 500 Valuation Profile (4,600 S&P 500) 

(Source: Dividend Kings S&P 500 Valuation & Total Return Tool) 

If the forward earnings expectations prove accurate (FactSet reports that on average analysts overestimate earnings growth by 2% to 4% per year) then 4,600 on the S&P 500 by the end of 2022 would still represent a 23.5 forward PE. That would be a 42% historically overvalued market. However, this brings us to another reason that 2021 is likely to be a great year for stocks.

Low-Interest Rates Are Likely To Persist Into Next Year

The bond market, the so-called “smart money” on Wall Street, is expecting very modest inflation for the next 30 years. This is likely to allow the Fed to make good on its plans to not raise rates through the end of 2023 at the earliest. But more important for stock prices is that long-term interest rates remaining lower for longer minimizes the risk of Moody’s “lost decade” for the S&P 500.

Moody’s base-case economic forecast is for 10-year treasury yields to start rising quickly in 2021 and keep rising all the way to 4.3% by the end of 2030. That would represent such a shock to this “there is no alternative” stock market that Moody’s base-case forecast is for the market to deliver negative returns for the next decade.

Don’t get me wrong, I’m not telling you that paying 23.5X earnings for stocks is reasonable or prudent, no matter how long rates stay low. But the fact remains that as long as long-term rates don’t rise too quickly, the chances of a lost decade fall. Which brings us to the final and most important fact smart investors need to know about 2021.

Certain Sectors Are Poised To Earn Glorious Profits Next Year

“The vaccine announcement by Pfizer provided evidence that a path to normalization exists, which should serve as a catalyst for Value stock outperformance,” Kostin’s team wrote. “We expect the emergency use authorization (EUA) and distribution of an effective vaccine during the next several months will lead to significant upward earnings revisions for virus-exposed firms and help give investors confidence to rotate into those low-valuation stocks.” – thestreet.com (emphasis added)

Goldman, JPMorgan, Moody’s, UBS, and Morgan Stanley have all recently put out notes highlighting how the most pandemic ravaged blue-chips are poised for major profits in 2021 and beyond.

(Source: FactSet Research)

The hardest-hit sectors of 2020 are also the ones that analysts expect to recover most strongly in 2021 courtesy of the formula of a vaccine + stimulus = strongest growth in 21 years. Many of these companies happen to still be reasonably or attractively valued. Let me show you a perfect example of a company that represents a Buffett style “fat pitch”, that you might not initially think of.

Walgreens (WBA): The Best Deal Among Dividend Aristocrats

(Source: Imgflip)

WBA is normally a recession-resistant dividend aristocrat and thus not a company you’d expect to benefit much from vaccines and stimulus in 2021.

Walgreens Consensus Growth Estimates

(Source: F.A.S.T Graphs, FactSet Research)

In fiscal 2019 (which ended August 2020) WBA reported a 21% decline in EPS, courtesy of lockdowns hurting its retail sales, especially in Europe. It doesn’t help that WBA is in the middle of a major turnaround as well, which is expected to result in very modest fiscal 2020 earnings growth of just 1%. Yet take a look at 2021 and 2022 consensus estimates, which are for 8% growth in both years. Why on earth am I excited about 17% growth over two years when so many companies are expected to report much stronger growth courtesy of the end of this pandemic?

Best Time In History To Buy WBA

(Source: F.A.S.T Graphs, FactSet Research)

Because literally, WBA has never been this undervalued before. Not even in March 2020 or during the darkest days of the financial crisis could you buy Walgreens at 7.5X forward earnings. WBA is trading at such a low PE that, according to the Graham/Dodd fair value formula, it’s priced for -0.6% CAGR growth forever.

Walgreens Total Return Potential With Zero Growth Forever

(Source: F.A.S.T Graphs, FactSet Research)

As long as WBA grows at 0+% CAGR or faster, patient long-term income investors are guaranteed to make money, and actually stronger returns than analysts expect from the S&P 500 over the next five years. But WBA is NOT expected to grow at 0%, but 7% CAGR (according to 16 out of 22 analysts that cover it).

Walgreens 2025 Total Return Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

This means that, if WBA grows as analysts expect, then it could almost triple your investment over the next five years. 20% CAGR annual return potential from one of the most boring and pandemic ravaged dividend aristocrats on Wall Street, that’s what WBA is offering right now.

That’s return potential on par with the greatest investors in history.

(Source: Portfolio Visualizer)

It’s also very achievable returns given that this company is in the worst bear market in its history. From less attractive bear market lows of the last 34 years, WBA has delivered up to 44% CAGR total returns over the next five years, and 25% CAGR total returns over the next 15 years.

THAT is the power of combining quality + valuation + an obvious short-term growth catalyst. You don’t have to take huge risks with non-profitable IPOs, SPACs, or cryptocurrency to earn monster returns while locking in generous, safe, and steadily growing income. You just need to remember that “it’s a market of stocks, not a stock market”, and that something great is always on sale.

(Source: Imgflip)

Want More Great Investing Ideas?

9 “MUST OWN” Growth Stocks for 2021

Are Stocks Off to the Races in December?

7 Best ETFs for the NEXT Bull Market

SPY shares were trading at $368.98 per share on Friday afternoon, up $2.29 (+0.62%). Year-to-date, SPY has gained 16.29%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Adam Galas

Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...

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