S&P 500 3650, Dow 32,500
If you pay close attention to our stock market forecasts, the
title of this piece will look familiar.
At the end of 2019 we made the same exact forecast for the
end of 2020 — the strangest year in our lifetimes, and it’s not
even over. Compared to most analysts, this was a very bullish
call. And then, when the market hit a pre-COVID19 peak of
3386 in mid-February, if anything we looked not bullish enough.
Then the bottom fell out of both stocks and the economy,
struck by a combination of COVID19 and overly-strict
government shutdowns. The S&P 500 bottomed at 2237 on
March 23, pricing in an 80% drop in corporate profits from the
year before, making our call of 3650 look obsolete.
About seven weeks later, on May 8, stocks had recovered
back to 2930, but we figured 3650 was probably still obsolete,
and so revised our year-end forecast for the S&P 500 to 3100.
Still bullish, but from a lower base.
Then, only four weeks later, the S&P 500 had blown
through our updated year-end target and was sitting at 3194. So
we revised up our year-end target again, this time to 3350.
But, here we are at the end of August and once again stocks
have blown through our updated target, closing last week at
3508. As a result, we’re moving our target back up to exactly
where we started: 3650.
The key lesson in all this should be that it is a fool’s errand
to try to time the market. Imagine being told on February 15
that the world was about to be hit by a widespread virus for which
there was no known therapy or cure, that governments were
going to react by shutting down massive swaths of their
economies, and that US real GDP was about to drop at the fastest
rate for any quarter since the Great Depression.
Then imagine you had to make a choice about how you
would allocate your investments through year end. Many
investors would have opted to sell their equities and not look
back. But, as we now know, the better choice would have been
to grit your teeth and stay invested.
In order to make a stock market forecast we use a model
based on capitalized profits. Our model takes the government’s
measure of profits from the GDP reports, divided by interest
rates, to measure fair value for stocks.
To be cautious, we’re using the level of corporate profits in
the second quarter, when they were down 20.1% from a year ago,
and at the lowest level in nine years, a level from which they are
very likely to recover in the third quarter and beyond. In
addition, we are NOT using the current 10-year Treasury Note
yield of 0.7%, which generates absurdly high targets for equity
prices. Instead, we’re using a 10-year yield of 2.0%. And at that
yield, with profits remaining at second quarter levels, our model
says the S&P 500 is fairly valued at 4052.
In other words, we would not be shocked if stocks went
even higher than our year-end target of 3650 and barring a major
shift in public policy as a result of the election in November,
expect further gains in the 2021.
Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and
reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.