It’s hard to find a strategist predicting a negative return for the S&P 500 next year. That’s not unusual. Strategists tend to be an optimistic bunch, at least when it comes to one-year-out S&P 500 price targets. They may wring their hands on all manner of subjects, but in the end, their target for next year is usually higher than where the market is this year when they make them. You might think that after two years of 20% plus S&P 500 returns, there would be more who call for a down year. But in our view, there is more career risk in calling for a down market and being wrong, than calling for an up market and being wrong.
Predictions for 2025 are on the conservative side and the herd seems to be huddling closer together. According to a FactSet compilation of 11 sell side strategists’ 2025 S&P 500 price targets and some of the supporting data, the estimates are in the tightest relative range since 2019, with a standard deviation of just 3.8% of the average price target. This is down from a standard deviation of 6% last year and over 11% in 2022. Recall that 2022 came after three straight years of positive calendar year returns, so since then S&P 500 price targets among strategists have converged As the saying goes, there’s safety in the crowd.
The average price target of the 11 surveyed is 6,588. Just for the sake of round numbers, let’s call that 6,600. We don’t know the dates that the strategists calculated their targets, but it was likely sometime around the end of November when the S&P 500 was fluttering around 6,000. That would be a 10% return, coincidentally, perhaps, the same as the longer-term average return on the index the last two or three decades. The lowest published estimate of the group was 6,000. We’ll see if that ends up being down from year-end 2024. The highest of the group was 7,007. Yes, a palindromic number ending in double O7. The only target with a non-zero number in the “ones” column, except for the curious one in the middle at 6,666. Numerology and religion aside, I don’t think those two numbers are accidents or products of multiplication.
What’s the multiple, Kenneth? A useful way to think about these price targets is to break them down into an earnings estimate for year end 2025 and the P/E multiple you think the market will assign it. The earnings estimate speaks to earnings growth and the multiple speaks to everything else in the whole wide world for the foreseeable (and not-so-foreseeable) future, including, but not limited to, inflation, interest rates and the general level of angst. Interestingly, FactSet’s Earnings Insight Report shows that the average analyst estimate for CY2025 S&P500 earnings is 15% growth over what they are estimating for 2024. So, if the price target is up 10% and earnings growth is up 15%, then that means that the P/E multiple compresses. Probably not unreasonable given today’s lofty valuations. Nobody seems to be predicting multiples will expand from here.
The range of reasonable outcomes for stocks next year is wide. Notwithstanding the clustered estimates. We continue to structure our positioning to express diversified exposure to opportunities and risk.
Happy Holidays and Happy New Year to all!
By Thomas Martin
Originally published December 24, 2024.
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