Charging Bull

Dr Ed Yardeni

Excerpt from June 24, 2024 Yardeni Research Morning Briefing.

Strategy I: Hoof Marks. Even the bulls are getting trampled by the bull market in stocks. Many investment strategists are scrambling to raise their targets for the S&P 500. At the end of 2022, we predicted that the index would increase 20% from 3839 to 4600 by the end of 2023. It got there by the end of July of that year.?We stuck to our target as a correction down to 4117 unfolded through October 27, 2023. The index rebounded to 4769 by the end of last year, slightly exceeding our target (Fig. 1).

At the end of last year, our year-end target for 2024 was 5400, which was among the most bullish forecasts out there. The index surpassed our target on June 12. It closed at 5464 on Friday.

Joe and I aren’t scrambling to raise our target. Instead, we are reiterating that the bull market is likely to continue through 2025 and 2026, with our year-end targets at 6000 and 6500, respectively. By the end of the decade, we see 8000 on the S&P 500. After all: It’s the Roaring 2020s, Baby!?(Our Roaring 2020s thesis reflects our expectation that rising productivity growth, thanks to widespread adoption of new technologies in response to the shortage of skilled labor, will support robust growth in GDP and profits, while keeping a lid on inflation.)

A few strategists recently raised their year-end 2024 targets for the S&P 500 to 6000, with the hedge that the index, after reaching that level, might take a dive. We agree that the market is showing signs of a meltup that might be setting the stage for a meltdown. But if so, we think the meltdown would more likely be a rapid 10%-20% correction than an outright bear market (i.e., with a drop greater than 20% from the peak). That’s because we aren’t expecting a recession. Furthermore, the Fed Put is back now that consumer price inflation has fallen closer to the Fed’s 2.0% y/y target by the end of the year. If the stock market starts to fear that a recession is nearing, the Fed will most likely relieve that anxiety by easing.

By the way, on January 20, 2023, Bloomberg posted its list of Wall Street’s investment strategists with their outlook for S&P 500 year-end targets and earnings per share for the year. The averages were 4050 and $210; we had 4,600 and $225. On January 19 of this year, the averages were 4867 and $234; we were and still are at 5400 and $250. Our S&P 500 target for the end of this year was the highest of the lot.

Strategy II: Earnings & Valuation. In a recent QuickTakes, we observed that an earnings-led meltup should be more sustainable than a valuation-led meltup. The meltup of the late 1990s was mostly a valuation-led one for the S&P 500 Information Technology sector. However, industry analysts joined the irrational exuberance party by raising their earnings estimates, especially for Information Technology companies back then.

Currently, the valuation multiple of Information Technology is elevated, but not as much as it was?during the late 1990s. This time, earnings expectations are also rising for Information Technology, but they look to be based on more solid fundamentals than during the dot.com frenzy of the late 1990s.

Let’s have a closer look at the outlook for the broad market before turning to a comparison of the 1990s and now:

(1) Quarterly & annual analysts’ consensus estimates. As we noted before, S&P 500 earnings per share solidly beat expectations during Q1-2024 and boosted estimates for 2024, 2025, and 2026 (Fig. 2 and Fig. 3). At the start of the last earnings reporting season, industry analysts expected a 1.2% y/y growth rate. The actual result was an increase of 6.8%.

The analysts now expect the following increases over the rest of this year: Q2 (9.5%), Q3 (8.7%), and Q4 (14.3%). Interestingly, their Q2 consensus estimate hasn’t been lowered at all since the May 16 week. That’s unusual since they tend to lower their estimates for the coming quarter’s earnings season as it approaches.

Here are the analysts’ consensus S&P 500 earnings-per-share estimates and their growth rates for 2024 as of the June 20 week: ($244.77, 10.7%), 2025 ($279.30, 14.4%), and 2026 ($315.97, 12.1%) (Fig. 4). The S&P 500 forward earnings rose to a record $261.37 during the June 20 week.

(2) Our annual earnings estimates. Those estimates look quite reasonable to us since our projections are close to the analysts’ outlook. Here are our numbers: 2024 ($250), 2025 ($270), and 2026 ($300) (Fig. 5). We are projecting $400 by 2029. We haven’t changed our estimates for the past couple of years because we haven’t had to do so.

We are also estimating that S&P 500 revenues per share will grow 1.3% this year, 3.9% next year, and 4.1% in 2026 (Fig. 6). Our numbers are conservative relative to the consensus analysts’ expectations, currently at?4.6%, 5.8%, and 5.6% y/y.

In any event, our S&P 500 margin projections are about the same as analysts’ margin estimates: 2024 (us 13.2% vs them 12.6%), 2025 (both 13.7%), and (14.6% vs 14.5%) (Fig. 7). If the estimates for 2025 and 2026 come to pass, they’d mark new record highs for the S&P 500 margin.

(3) Forward earnings projections. Our?year-end S&P 500 forecasts are based on our forecast of analysts’ consensus forward earnings at the end of each year. In other words, we are answering the following question: What are industry analysts collectively likely to project for the coming year’s S&P 500 earnings per share at the end of 2024, 2025, and 2026? Our answers are $270, $300, and $325—which are the same as our forecasts for earnings for 2025, 2026, and 2027, respectively, as well (Fig. 8).

(4) Valuation projections & S&P 500 targets. A much tougher question is what forward P/Es we should apply to our S&P 500 forward earnings estimates. Since the bull market started on October 12, 2022, when the forward P/E bottomed at 15.2, we’ve been targeting the top end of a 16.0-20.0 range (Fig. 9). That was quite a bullish projection.

But it wasn’t bullish enough. Now, the forward P/E is 21.0 with forward earnings at $260. Forward earnings is very much on track to hit our $270 forecast by the end of the year. At a 21.0 multiple, the S&P 500 would end the year at 5670. At a 22.0 multiple, it would be 5940, very close to our 6000 target for the end of next year.

Strategy III: Technology Now & Then.?There is no obvious answer to the valuation question. So we are dependent on history for some guidance. We don’t have to go very far back in time to find a meltup that looks similar to the current one. The obvious analogy is to that of the?late 1990s:

(1) Valuation multiples, now & then. The S&P 500 peaked at a forward P/E of 24.5 during the week of August 13, 1999 (Fig. 10). The S&P 500 would rise to 6600 by the end of this year at that multiple with forward earnings at $270 per share. That could happen again if the S&P 500's meltup continues to be led by the index’s Information Technology sector, as it was back in the late 1990s. The sector’s forward P/E soared from 30.0 at the start of 1999 to 48.3 during the week of March 14, 2000. The sector’s current forward P/E is 30.0.

(2) Market capitalization & earnings shares, now & then. The Information Technology sector plus the Communication Services sector combined now account for a whopping 41.6% of the market capitalization of the S&P 500 (Fig. 11). That’s as high as they got just before the Tech bubble burst in early 2000. Then again, these two sectors currently account for 33.0% of the S&P 500’s forward earnings compared to just under 24.0% when the Tech Wreck started in 2000, arguably helping to justify so high a multiple—or at least more so than it was justified back then.

The problem is that forward earnings isn’t the same as actual earnings. The two sectors’ aggregate forward earnings soared over 200% from early 1995 through late 2000 (Fig. 12). But then their combined earnings estimate took a dive through late 2003. ?

3) Cisco vs Nvidia. The meltup during the late 1990s was led by Cisco, which made telecommunications equipment to build out the Internet. Today, the meltup is led by Nvidia, which sells GPU chips used to run AI software. Cisco’s stock price soared from $10 to a peak of $80 between early 1998 and early 2000 (Fig. 13). Nvidia’s stock price has soared from $11 to a recent high of $136 between late 2022 and mid-June of this year.

But the similarities stop there; look under the hood at valuations supporting the rises, and there’s a big difference. Cisco’s forward P/E peaked around 131.0 on March 27, 2000 (Fig. 14). Nvidia’s forward P/E has been fluctuating widely and wildly between 25.0 to 80.0 since early 2020.

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