Where Oh Where Does the S&P Go?

April 05, 2023

Yogi Berra once said: "Predictions are always diffcult, especially when it's about the future."

So, please keep this in mind as the short answer is nobody really knows.  However, if we take a look at the two determing factors of stock prices, earnings and the multiple, perhaps we can make some reasonable forecasts of potential outcomes in the coming year(s). 

First earnings. As of 3/27/23 consensus earnings estimates for the S&P 500 for 2023 and 2024 are $221.40 and $248.03 repsectively (according to Yardini Research).  Keep in mind that last year's S&P 500 earnings were $218ish (still getting final #s on the 4th Qtr).  That's only around 1.5% earnings growth year over year if it happens. Not great. If consensus is dead right (and it never is), 23' to 24' will have earnings grow of over 12%. Respectable by any measure.

So what will the mutiple be?? That's the question. Again, nobody knows but let's take a quick look at some historical numbers from the past 40 years. From our source, Thomson One, the average P/E multiple on a monthly basis from January of 1983 to March of 2023 was 22.6 and the mean was 20.1.  The lowest P/E multiple by month was reached in July of 1984. Keep in mind that the 10 year Treasury yield was close to 13% then, as opposed to around 3.3% today. National debt was roughly 37% of GDP in the 2nd quarter of 1984 as opposed to over 120% at this writing. The highest P/E ratio by month in the last 40 years was in January of 2009 - something around 70.  Huh? Yes. 

Keeping in mind that lower interest rates, with all things remaing equal, tends to favor longer term duration assets such as stocks. So if we bake all of these number into a probability cake and deduct that, on average, the S&P 500 P/E will hover in a neighborhood of 25% above or below its mean, we come to a multiple of 15 to 25.  Now, I'm throwing out the tails of the standard distribution and there are ALWAYS tail risks. But, the tail of a distribution has two sides, both positive and negative. Back to earnings.  We simply take 15 to 25 X 221.40 and we get a range of 3,321 to 5,535. In round terms, that's a possible -19% downside to positve 36% upside from the S&P 500's current value of 4090.  What about 2024.  OK, 15 to 25 times consensus of $248 = 3,720 to 6,200.

Now, if consensus is wrong? Ah... you had to ask.  Of course, they can be. But, they can be wrong in both directions. Things could get worse...or better!

The bottom line is that you should only be in stocks if you have a long term time horizon. The market has declined over -40% in one year....AND... it's appreciated by over 40% in one year. My expecation is that ten year from now, the market will be subtantially higher. In March of 2013 the S&P stood at approximately 1,569. Where will be it be in 2033? Likely, much higher. We shall see. 

*The information contained herein is derived from sources we believe reliabe but its accuracy is not guaranteed. All prices subject to change. Past performance is no guarantee of future returns. Any projections discussed herein are for analytical disussion only and do not represent a guarantee. Real rates of return can and will vary.