04/07/2025 Market Strategy
The Way You Do the Things You Do
We’re Reducing Our S&P 500 Price Target and Earnings Estimate
Key Takeaways
- We’re revising our price target for the S&P 500 at year-end to $5950, an upside of about 15% from its close on Friday, April 4th at $5074. We are basing our price target on an earnings estimate of $265 per share for a price multiple of 22.5x.
- We’ve updated our maximum drawdowns table to show the 17.4% decline in the S&P 500 index from its most recent peak at $6,144 on Feb. 19 through Friday’s close at $5,074. To put the drawdown in perspective, the 2025 decline is about 1.8 percentage points greater than the average annual drawdown experienced over the 1998 to 2024 period.
- Last week’s nonfarm payrolls report showed a stronger-than-expected 228,000 new jobs created in March. Despite the jobs gain, the unemployment rate ticked up a tenth to 4.2%. The ISM surveys showed business conditions weakening for both manufacturers and services firms.
- The Q1 earnings season gets underway on Friday when many of the big banks begin to report March quarter earnings. This week also brings the March CPI and PPI inflation reports.
The announcement and details of the new tariff regime last week along with the market’s reaction calls for a reduction in our year-end price target for the S&P 500.
The price target we initiated on December 9 last year implied a price for the S&P 500 by year-end 2025 of $7100 calling for approximately 17% upside from the S&P 500’s closing price of 6,052.08 on December 9. Our target appeared to us reasonable and attainable considering the sensitivity of the Federal Reserve’s monetary policy towards its dual mandate as well as the resilience of revenue and earnings growth across the S&P 500’s sectors.
We found further support for our target in the resilience of the consumer, jobs postings, an array of economic data and prospects for further improvement considering the outcome of the November election that pointed towards a shift in policy which would be more business friendly.
Trends in technological innovation and a broadening in the market rally in our view added support for further improvement in the US economy and the markets into and through 2025.
We based our price target on fundamentals and an earnings projection of $275 for the S&P 500 in 2025, which assumed an increase in earnings of some 10% and an implied forward P/E multiple of 25.8x
Changing our Price Target
Our revised price target for year-end 2025 of 5950 now calls for potential upside of about 15% from last Friday’s closing price of 5,074 with a potential to be raised later on this year should conditions change to provide a turn in sentiment. We reduce our earnings projection for the S&P 500 this year to $265 (a 3.6% reduction from earlier) with an implied forward PE multiple of 22.5x.
At current levels the equity market appears oversold in our view with uncertainty at levels investors find hard to embrace along with what we call “a negative pitch book” that seemingly projects negative outcomes to infinity that’s taken hold in the near term of trader, investor, and consumer sentiment.
Corporate managements’ guidance in our view unsurprisingly of late when offered as companies report quarterly results has trended towards the cautious side causing some analysts to trim or cut estimates compounding negative projection and sentiment.
While our expectations are for cooler heads to prevail in the trade negotiation process that’s likely to follow last week’s tariff regime announcements the market ‘s reactions and percentage of recent declines in some individual stocks (as well as among major equity indices) suggests to us a need to right size expectations in the near term.
We Remain Bullish
Our target price and earnings projection reductions do not imply a capitulation in our bullish outlook towards equities but rather a need to set expectations reasonably as to how fast and to what levels stock prices are likely to recover based on the degree of uncertainty tied to the current tariff regime as announced last week and the levels to which stock prices have fallen.
The Federal Reserve’s monetary policy and existing economic fundamentals remain respectively sensitive and intact though buffeted by current levels of skepticism, fear, and greed.
Upside Potential Remains
Should cooler heads prevail in negotiations on trade effectively addressing the need to cut deficit spending and solutions to manage the reduction of the national debt – we, along with other market participants, may well have to consider adjusting market price targets higher once again.
We remain overweight US equities while maintaining meaningful exposure to both developed and emerging markets on expectations that US economic growth will help boost activity around the world and lead to a global economic recovery.
Exposure to US large cap companies that do significant amounts of business outside the US also can offer exposure to international markets through their overseas operations. Further weakening in the dollar could boost the results from foreign operations of these companies.
Inflation Data Due This Week
In this week, we look for economic data stateside to shed further light on inflation, small business, and consumer sentiment along with the release of the Fed’s minutes from the most recent FOMC meeting.
Earnings Season Begins This Week
The unofficial start of S&P 500 Q1 earnings season, which begins on Friday when the big banks begin to report results, should provide details on how companies are navigating the change in policy administration in Washington so far this year and what their expectations are for what lies ahead.
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