12/09/2024 Market Strategy
Will You Still Love Me Tomorrow?
Although the S&P 500 Closed at its 56th Record High for this Year, We Remind Our Readers that Trees Don’t Grow to the Sky
Key Takeaways
- We are initiating our price target for the S&P 500 for 2025 at 7100 by year-end. This is 16.7% above last Friday’s close and implies a 25.8x multiple over our earnings forecast of $275.
- At $275 projected earnings for 2025, our expectations are for 10% earnings growth above our current $250 projected earnings for 2024.
- We discuss how companies in all eleven sectors could benefit from greater efficiencies via artificial intelligence to further serve the needs of business and customers.
- Last week’s nonfarm payrolls report showed a rebound in activity following October’s storm– and strike affected results. The ISM survey showed business activity resilient with manufacturers still facing headwinds from the strong dollar.
- This week brings the first readings on inflation pressures in November with reports due on consumer and producer prices.
We acknowledge that valuation projections across asset classes historically reside in the eyes of a diverse group of market participants with one outcome proven correct if usually in hindsight.
Currently traders and investors of bullish persuasion (of which we are part) point to fundamentals that suggest the current resilience of the economy and the stock market appear poised to continue into next year while bears, skeptics, and nervous investors express concern of pending retracement risk sourced in views based on prior market history or market technical factors that could turn some near weakness on a data point or corporate guidance into a period of repricing to the downside.
We Initiate our Target Price for the S&P 500 for Year End 2025
Based on a number of factors including current stateside monetary policy, the resilience in economic growth, business activity, the consumer, and job creation evidenced in recent years and the current year, we initiate a price target for the S&P 500 by year-end 2025 of 7100 with an earnings projection of $275 suggesting a forward PE multiple of 25.8 x.
Our S&P 500 price target for 2025 suggests 16.7% upside from last Friday’s close at 6090 and upside of 14.52% from our current S&P 500 year-end price target of 6200 for this year 2024.
At $275 for projected earnings for 2025 our expectations are for 10% earnings growth above our current $250 projected earnings for this year (2024). Our 2025 price target suggests a forward PE multiple of 25.8x.
Investing Beyond Fear and Greed but for Need
Beyond fundamentals that suggest to us further upside for equities from current levels there is increased private investor appetite across demographic groups for equities. This suggests to us an emphasis among investors on traditional “needs based” investing wherein the objective or goal is centered around the need to meet responsibilities and to provide for things such as: growth of retirement assets for both income and asset growth; to provide a standard of living in what might be a longer retirement period than previous generations enjoyed and with less contribution today going forward from social security and defined benefit retirement programs; providing for a child’s education; investing for family legacy and philanthropic objectives.
History suggests that equities can be a resource for building assets, providing for example dividend income and hedging against inflation over intermediate and long time periods.
The broadening of the market from the market lows on October 27, 2023 along with ongoing rebalancing and rotation among sectors, market capitalizations (large, mid and small stocks), style (growth and value) and cyclicals and defensives suggest to us that the current bull market likely has legs strong enough to climb the proverbial “wall of worry” into and through 2025.
The quality of economic, business, consumer and job growth data from the start of the Fed’s rate hike cycle in March of 2022 through the initial cuts to its benchmark interest rate in September and November (and likely again this month of December) suggests further underlying support for the economy to sustain the current bull market.
Beyond fundamentals artificial intelligence (AI) presents in our view a watershed point on the historic timeline of technology and economic progress that may parallel the automobile’s contribution to the economy from the 1920’s. That period of progress deeply changed the way, where, and how people lived.
Over the course of the last forty years (and at an accelerated pace in the last 20 and 10 year periods) we have seen a broad array of technology become deeply embedded in the processes of business, the lives of consumers, in medicine, in education, and in government. In the period that lies ahead we look for AI to provide improved efficiencies for these groups.
In the equity markets companies in all eleven sectors could benefit from improved productivity via AI to further serve the needs of business and customers.
We’re not suggesting paradise on earth nor are we expecting a “Goldilocks world” but rather a genuine potential for AI to provide greater efficiencies in key areas that are challenging progress today across the sectors and society. The potential for better virtual shovels and virtual drill bits to mine a world of increasing mountains of data to find solutions at a quicker pace could be one of its greatest contributions.
The Week Ahead
In the week ahead market participants will likely focus on the first indications of inflation for November with the release of the consumer price index and the producer price index along with the results of four widely followed companies belonging to the technology and consumer sectors.
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