We've been bullish on the stock market since October 2022. We remain bullish, targeting 7000 on the S&P 500 by the end of next year. That puts us near the head of the pack (chart).
We've been bullish on the stock market since October 2022. We remain bullish, targeting 7000 on the S&P 500 by the end of next year. That puts us near the head of the pack (chart).
Here's more on earnings and valuation:
(1) Our forecasts for revenues, earnings & margins. We lead the pack on the outlook for S&P 500 companies’ collective operating earnings per share next year, projecting $285, up 18.8% y/y (chart). That's consistent with our productivity-led Roaring 2020s scenario for 2025, in which real GDP rises 3.0%-3.5% while inflation remains subdued around 2.5%. In our 2025 outlook, S&P 500 revenues per share should rise 5.1% to $2,050 as the profit margin rises to a record 13.9%.
(2) Analysts' consensus earning forecasts. Industry analysts currently forecast earnings per share of $243 this year, $275 next year, and $310 in 2026 (chart). Forward earnings, the time-weighted average of analysts' consensus earnings estimates for the current year and the coming year, rose to a record-high $274 during the December 19 week. The S&P 500 closed at 6037.59 on Thursday, putting the forward P/E at 22.0.
(3) Profit margins. The S&P 500 forward profit margin rose to a record 13.6% during the December 19 week (chart). That's a full percentage point above the Q3-2024 actual profit margin of 12.6%. We expect that President Trump will cut the corporate tax rate again, from 21% to 15%, later next year, which should boost the profit margin by at least half a percentage point. His cut in this rate from 35% to 21% in early 2018 boosted the margin by a full percentage point.
(4) Earnings vs valuation. We are expecting that earnings growth will account for all of next year's gain in the S&P 500, with a slight decline in the forward P/E. If the valuation multiple continues to lead the market higher, we'll have to acknowledge that the resulting meltup could set the stage for a meltdown. Needless to say, the forward P/E, which stood at 22.3 in November, is rich and harkens back to the late 1990s when the Tech bubble led to the Tech wreck (chart). For now, our subjective probability of a meltup remains at 25%.
