At the start of every year, Wall Street investment banks roll out their predictions for what they think will happen in the year ahead. It’s always a good idea to have a plan, to map out your expectations.
If you’re right, you’ll make money. If you’re wrong, you may not make as much money – but you’ll have a good sense of where your expectations are not being met. Which makes reassessing – and perhaps reallocating – easier.
For instance, if you came into 2024 with a bullish stance on AI stocks, the rally for electricity stocks wouldn’t have taken you by surprise. Even if you weren’t looking at power stocks to start the year, the fact that the proliferation of AI applications use a ton of electricity and that means more revenue for companies that generate electricity is a pretty easy leap to make.
All the gurus and strategist types start their year-ahead predictions with targets for the S&P 500. Part of the fun of reviewing these targets is to see how wildly inaccurate they are. Wall Street tends to miss the mark by a country mile.
Coming into 2024, JP Morgan was among the most bearish on stocks. JP Morgan predicted the S&P 500 would finish 2024 at 4,200. The S&P 500 closed at 4,742 on the first day of trading in 2024. That was pretty much the low point of the year (so far). The S&P 500 closed on Friday at 5,431. JP Morgan’s outlook for the year has been so wrong you can’t help but wonder if they did it on purpose…
Snatching Defeat
Now, I’m not one to whistle past the graveyard. We all know how the “prevent defense” can snatch defeat from the jaws of victory in an NFL game. It’s always possible that some black swan event will send the market into a tailspin…
Still, I’m going to do the victory dance today. Because I had probably the most bullish forecast for stocks in 2024…
On December 20, 2023, I wrote:
S&P 500 hits 5,865 (or higher) – As recently as October 2023, the Wall Street consensus was that we’d get a recession for the U.S. economy early in 2024. Now, at the end of December, virtually all Wall Street investment banks are calling for new record highs in 2024. If it seems like Wall Street has a hard time thinking independently, well, I think you might be onto something. These strategist-types seem to be more concerned with which way the prevailing wind is blowing at any given moment (and confirming client biases) than offering up any real analysis, but, that’s a discussion for another time…
With that said, typically bullish Bank of America has a 5,200 target for the S&P 500 in 2024. That’s roughly 10% higher than current levels…
Now, I can tell you exactly how BofA came up with this forecast. The S&P 500 earnings are expected to finish 2023 at $221 a share. And analysts are estimating 11% earnings growth for 2024 – to $246.30 a share. So Bank of America’s forecast for the S&P 500 is simply based on current estimates for earnings growth. Kinda disappointing isn’t it?
Right now, the S&P 500 trades at 19 times that $246.30 earnings estimate – a forward P/E of 19. The S&P trailing P/E (based on full-year 2023 earnings expectations) is approximately 22. Bank of America’s 5,200 target for the S&P 500 implies a P/E of 21
Bank of America is saying “Yeah, 2024 earnings will come in as expected and valuations will stay where they are now.”
Talk about going with the status quo…
The problem is: how often does the stock market do what people expect? Mmmm…that would be…never.
Let’s start with the Price-to-Earnings (P/E) ratio. A lot of investors pretend that a P/E ratio is an absolute measure of value. As in, a stock with a P/E of 10 is cheap and will go higher, and a P/E of 25 is expensive and means a stock will go lower.
It’s ridiculous. A P/E ratio measures sentiment – how much investors will pay (P) for earnings (E). And the more bullish investors are, the higher P/E ratios will go.
And why do investors get bullish? Usually, it’s because economic data and earnings are beating expectations and stock prices are moving higher.
One surprise from 2023 was the number of companies that beat earnings estimates. Over the last 12 months, Nvidia beat earnings estimates by a total of $1.49 a share. That’s added about 0.7% to full-year S&P 500 earnings vs. expectations. Intel beat estimates by a total of $0.46. Microsoft beat by $0.73. GM beat by $1.41…
Pretty soon, earnings beats add up.
And remember, 2023 wasn’t all sunshine and roses. For 2024, some tailwinds could push earnings higher than expected. Fed rate cuts will make mortgages and car loans cheaper, low employment, higher wages, and lower inflation could provide a significant boost to spending, and the continuation of re-shoring will keep investment in the U.S…
There’s a strong case to be made that 2024 earnings will come in better than the current estimate of $246.30. And if companies are beating expectations, then stocks will trade with a higher P/E multiple.
2015-2018, the P/E ratio for the S&P 500 ran between 23 and 24. I believe 2024 S&P 500 earnings will come in better than expected, at $255 a share. At a P/E of 23, we get a high for the S&P 500 of 5,865. Increase that P/E to 24, and we get 6,120.
So there you have it: I estimate the high for the S&P 500 in 2024 to be between 5,865 and 6,120.
The Secret to My Success
Over the weekend, Wall Street investment banks fell in line and started upping their year-end targets – for the exact same reasons I laid out 6 months ago.
Goldman Sachs, UBS and Bank of America now all say 5,600 for the S&P 500. Evercore ISI says 6,000.
It’s about time.
Now, if you didn’t read my entire explanation behind my bullish forecast, that’s OK. I can sum it up for you with one word: earnings.
Corporate earnings are always the lifeblood of the economy and the stock market. And American corporations are incredibly good at streamlining their operations to cut costs, launching new products, and growing earnings.
Of course, some are better at it than others – but as a group, they are winners. If you start from the belief that betting on the winners is a good idea, chances of success go way up.
Godspeed,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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