The fact that Wall Street’s annual forecasts for the S&P 500 are, um, unreliable — that isn’t a new story.
Neither is the fact that the average Wall Street mucky-muck and their ho-hum 8% call for the S&P 500 in 2024 were not nearly bullish enough…
It’s also a fact that my scary-accurate forecast from a year ago – which came within 20 points of the S&P 500s actual 2024 high – hasn’t gotten nearly enough attention…but I guess that’s a job for my publicist.
In any event — you should be aware that the average Wall Street strategist appears to be trying to make up for their underwhelming grasp of how the stock market works. The most bullish now say that the S&P 500 will hit a high of 7,000-7,100 in 2025.
In other words – after missing a 29% rally in 2024, they expect 2025 to deliver a 16%-18% gain.
I have some thoughts…
Beating Expectations
The stock market is all about expectations. Beat them, and the price goes up. Miss expectations and prices will fall.
Coming into 2024, expectations were fair to middlin’.
But, as of December 30, 2023, we had these tea leaves to read —
- The Fed had just signaled that the next move for interest rates was lower
- Nvidia had already posted a couple of blowout earnings reports due to booming AI sales
- OPEC was cutting production just to keep oil at $75
- The government was spending hundreds of billions to bring supply chains home
- Consumers still had plenty of COVID savings
- The labor market hadn’t blinked at a record pace of rate hikes
- And neither had corporate earnings
- The S&P was just challenging the 2021 highs…
And yet Wall Street was hemming and hawing “well, maybe an average 8% or 10% move…”
C’mon man! If there was ever a perfect storm for stock prices to surge, that was it. That list was the reason that I expected solid earnings growth and an even more solid ramp for Price-to-earnings (P/E) ratios…
What are expectations now?
2025 Predictions
Corporate earnings are fundamental. But P/E ratios are about sentiment. A P/E ratio tells you how investors feel about those earnings. It’s a measure of confidence that those earnings will continue…
Think of a P/E ratio in terms of actually buying a company. Say you get a loan to buy a company and the company’s books say you’ll be able to pay off the loan out of the company’s earnings in 10 years. That’s a P/E of 10. Not bad…
Let’s go on and say you think there’s upside for the company. You believe earnings will grow faster than expected and you’ll be able to pay off that loan in 8 years. Forward P/E of 8, even better…
Right now, the P/E ratio for the S&P 500 sits at 24. That’s a bit above the 10-year average, but not egregiously so. It’s clear that analysts have confidence that 2025 earnings will come in a little better than expected…
But they almost never do:
The light gray bars are earnings estimates at the start of the year, the dark bars are the actual results.
Analysts say earnings for the S&P 500 will jump 11% in 2025, from $247 a share in 2024 to $275. History says they will not be that good…
Analysts’ price targets for the S&P 500 imply that the P/E ratio will jump to 26-27. So if earnings do what they usually do and come in a little short of expectations, that means P/E ratios will have to rise to 28 or higher to get the S&P 500 to current year-end targets of 7000-7100.
The question to ask is: will investors be even more confident about earnings growth and stock valuations than they were in 2024? I doubt it…
- COVID savings are gone, consumers have turned to debt to fuel spending
- Credit card delinquencies are rising
- Inflation may not be dead
- Bond yields and mortgage rates remain high
- No rate cuts in the first half of 2025
- Jobs market is cooling off
For my 2025 Predictions, I wrote:
Coming into 2024, I was convinced that investors were underestimating the power of the Mag 7, that investor sentiment would improve and that P/E ratios would move higher.
The opposite is true for 2025…
My 2025 S&P 500 target is 6,325.
Yes – I’ve gone from being the most bullish to among the least bullish.
And for the record, I’m happy to be wrong. I’ll gladly take another +20% run for the S&P 500! But I gotta call it like I see it.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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Thanks Boomer!
