Stocks are vulnerable to a near-term pullback as the market overestimates a 2021 recovery, CFRA says

• Investors should brace for a near-term pullback in the first quarter of 2021, according to CFRA's Sam Stovall. 
• "Domestic equity markets appear to us to have over-discounted a second-half 2021 economic and EPS recovery...and as a result may be vulnerable to a Q1 pullback," the chief investment strategist said in a note to clients on Wednesday.
• Stovall also sees the S&P 500 reaching 4080 by the end of 2021, a 9.5% upside from current levels.
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Investors should brace for a near-term pullback in the first quarter of 2021, according to CFRA's Sam Stovall. 

Positive vaccine news has left many investors hopeful that the economy will reopen and recover during the summer of 2021. Stovall explained that the market now is showing signs that investors are overestimating a recovery in the economy and earnings in the second half of 2021. 

"Domestic equity markets appear to us to have over-discounted a second-half 2021 economic and EPS recovery...and as a result may be vulnerable to a Q1 pullback," the chief investment strategist said in a note to clients on Wednesday. 

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Stovall noted that the Russell 2000 is currently more than 30% above its 200-day moving average, and the 12-month return differential for the S&P 500 growth-value indices remains at a level not seen since December 1999, shortly before the "Dotcom" bubble burst. 

However, the chief strategist sees the S&P 500 gaining 9.5% in 2021. He reiterated his 12-month price target for the benchmark index of 4080, a sign that 2021 will be a positive year for stocks.

Stovall recommends investors stay overweight consumer discretionary stocks, health care, industrials, and materials. He recommends investors are underweight utilities, real estate, and consumer staples.