Citi has raised its price target for the S&P 500 (INDEXSP:.INX) to 1,975 by the end of 2014, even though sentiments are ‘euphoric’, tapering is underway, and the company thinks there is a good chance of a downward correction in the first half of the year.

“The next year is unlikely to be as profitable as the past year, but it is also improbable that the market gets derailed even though sentiment is less than compelling,” writes Citi analyst Tobias Levkovich. “There were some major pullbacks between 1982 and 2000, during an uncontested secular bull run and significant pullbacks can occur just as major rallies conversely can happen during secular bear markets.  We expect 2014 to be a bumpier ride than 2013 and hence we would like to use as many shock absorbers as possible.”

S&P 500 2014 estimate pulled into 2013: Citi

The main reason for the price target increase (up from 1900) is simply that the market is currently where Citi expected it to be by the middle of 2014. If you assume that we are in a secular bull market, which Citi argues that we are, being six months ahead of schedule is a good reason to push the price target up.

S&P 500 Citi

But Citi is tactically cautious in the short term, saying that there is a good chance of 5-10% correction in the next six months. Levkovich cites excessive earnings estimates, tapering, and higher expected volatility as factors that could contribute to the downward correction, but he doesn’t think any of this will knock the bull market off course.

Russell PE currently above S&P 500 PE: Citi

With so much bullish sentiment going around (even among analysts slightly concerned about market sentiment) it shouldn’t be surprising that there aren’t many good value stocks to be found. The Russell PE is currently higher than the S&P 500 (INDEXSP:.INX) PE, largely because investors have been buying up value stocks during the 2013 rally to benefit from multiple expansion on the cheap. The low PE dispersion we have seen in 2013 looks like it will continue until some stress on the system shows which companies have earned their rising stock prices and which have just been along for the ride.

russell pe less sp500