Wall Street strategists are nailing one of their more important forecasts for 2024 🎯
Plus a charted review of the macro crosscurrents 🔀
📆 TKer will be off next Sunday. The free weekly newsletter will return on Sunday, Dec. 8. Happy Thanksgiving!
📈The stock market rallied, with the S&P 500 climbing 1.7% to close the week at 5,969.34. It’s now up 25.1% year to date and up 66.9% from its October 12, 2022 closing low of 3,577.03. For more on recent stock market moves, read: Policymakers don't want to tank the stock market 🤝 and Keep your stock market seat belts fastened 🎢
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Last week, Wall Street began circulating their outlooks for the stock market in 2025.
For many folks, the key takeaway from these reports is the year-end price target.
As TKer subscribers know, I’m not crazy about taking these price targets too seriously. Sure, I keep an eye out for these targets (see here, here, and here). But I’m far more interested in the rigorous research behind these predictions. That’s because much of the underlying data and analysis that go into these calls is high quality and very insightful.
While it’s been the case their year-end price targets have been way off on the conservative side, strategists have actually nailed one important prediction: 2024 earnings.
At the beginning of the year, strategists’ estimates for 2024 S&P 500 earnings per share (EPS) ranged from $225 to $250.
According to FactSet, after three quarters worth of reported earnings, 2024 EPS is on track to be $240. That is to say, the consensus midpoint EPS estimate has been off by what amounts to a rounding error.
“Wall Street analysts have been reasonably good at predicting forward year earnings over the last few years,” wrote Nicholas Colas, co-founder of DataTrek Research.
How we’re getting these earnings might not be exactly how the strategists may have laid out a year ago. But they were right about major themes driving earnings growth like persistently high profit margins and looser Fed monetary policy.
If the earnings have been coming through, then why have strategists been so off with their price targets?
As we discussed in the May 24 TKer, assumptions about valuation multiples are where Wall Street’s calculations often go wrong.
At the beginning of the year, forward price/earnings (P/E) multiple was 19x. Many strategists believed that was high and there was little room for it to go higher. Some even expected it to come down.
Today, the forward P/E is about 22x. At first glance, the difference between 19x and 22x might not seem like much. But when you actually apply it to an EPS estimate, the range of S&P price scenarios can be wide. For example, here’s what the price scenarios look like assuming $275 EPS (which is what the consensus is expecting for 2025):
19x $275 EPS = 5,225
20x $275 EPS = 5,500
21x $275 EPS = 5,775
22x $275 EPS = 6,050
Differing assumptions about valuations are often why price target calculations vary, and inaccurate assumptions about valuations are why those targets almost always go wrong.
For more, read: Where Wall Street's year-end price target calculations often go wrong 😑
The big picture 🖼️
For long-term investors in the stock market, I don’t think it’s a good use of energy to obsess over exactly where the stock market might be exactly one year from now — especially since no one has figured out how to do that accurately and consistently.
It is, however, much more helpful to be aware of the fundamentals driving earnings because earnings are the most important long-term driver of stock prices.
If the prospects for earnings growth are attractive, then it’s probably not crazy to think stock prices will head in that direction.
Indeed, it’s usually the case that EPS have grown, and it is also the case that the S&P 500 has moved higher.
Similarly, strategists’ annual forecasts tend to predict the direction of earnings is up and the direction of prices is also up.
Maybe strategists rarely nail their price targets. But directionally, they tend to get things right.
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Related from TKer:
A familiar pattern is emerging in Wall Street's 2025 stock market targets 📈
Where Wall Street's year-end price target calculations go wrong 😑
Watch! 📺
📺 I caught up with J.C.Parets and Spencer Israel on StockMarketTV! We talked about the outlook for stocks in 2025, the mania in memes, the best Korean restaurant in Manhattan, and more! Check it out on YouTube here! (I come in at the 32 minute mark.)
Review of the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🦃 Thanksgiving dinner got cheaper. From the American Farm Bureau: “The American Farm Bureau Federation’s 39th annual Thanksgiving dinner survey provides a snapshot of the average cost of this year’s classic holiday feast for 10, which is $58.08 or about $5.80 per person. This is a 5% decrease from 2023, which was 4.5% lower than 2022. Two years of declines don’t erase dramatic increases that led to a record high cost of $64.06 in 2022. Despite the encouraging momentum, a Thanksgiving meal is still 19% higher than it was in 2019, which highlights the impact inflation has had on food prices – and farmers’ costs – since the pandemic.“
For more on inflation, read: The end of the inflation crisis 🎈and The Fed closes a chapter with a rate cut ✂️
👍 Consumer sentiment improves. From the University of Michigan’s November Surveys of Consumers: “In November, sentiment extended a four-month stretch of consecutive incremental increases. Post-election interviews were 1.3 points below the pre-election reading, moderating the improvement seen earlier in the month. Overall, the stability of national sentiment this month obscures discordant partisan patterns.“
The survey emphasized the politics factor: “In a mirror image of November 2020 (see chart), the expectations index surged for Republicans and fell for Democrats this month, a reflection of the two groups’ incongruous views of how Trump’s policies will influence the economy… Ultimately, substantial uncertainty remains over the future implementation of Trump’s economic agenda, and consumers will continue to re-calibrate their views in the months ahead.“
For more on sentiment, read: Beware how your politics distort how you perceive economic realities 😵💫 and We're taking that vacation whether we like it or not 🛫
💳 Card spending data is holding up. From JPMorgan: “As of 12 Nov 2024, our Chase Consumer Card spending data (unadjusted) was 0.9% above the same day last year. Based on the Chase Consumer Card data through 12 Nov 2024, our estimate of the US Census November control measure of retail sales m/m is 0.36%.”
From BofA: “Total card spending per HH was up 0.6% y/y in the week ending Nov 16, according to BAC aggregated credit & debit card data. Within the sectors we report, online electronics, airlines & lodging showed the biggest y/y rise since Nov 3.“
For more on the consumer, read: Americans have money, and they plan to spend it during the holidays 🎁
💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 213,000 during the week ending November 16, down from 219,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
⛽️ Gas prices tick lower. From AAA: “At the pump, the national average for a gallon of gas dropped two cents since last week to $3.06 – matching the January 2024 low. There are now 28 states with averages below $3.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🏠 Mortgage rates tick up. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.84%, up from 6.78% last week. From Freddie Mac: “Heading into the holidays, purchase demand remains in the doldrums. While for-sale inventory is increasing modestly, the elevated interest rate environment has caused new construction to soften.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏚 Home sales rise. Sales of previously owned homes increased by 3.4% in October to an annualized rate of 3.96 million units. From NAR chief economist Lawrence Yun: “The worst of the downturn in home sales could be over, with increasing inventory leading to more transactions. Additional job gains and continued economic growth appear assured, resulting in growing housing demand. However, for most first-time homebuyers, mortgage financing is critically important. While mortgage rates remain elevated, they are expected to stabilize.”
For more on housing, read: The U.S. housing market has gone cold 🥶
💸 Home prices rise. Prices for previously owned homes rose from last month’s levels. From the NAR: “The median existing-home price for all housing types in October was $407,200, up 4.0% from one year ago ($391,600). All four U.S. regions registered price increases.”
🏠 Homebuilder sentiment improves. From the NAHB’s Carl Harris: “With the elections now in the rearview mirror, builders are expressing increasing confidence that Republicans gaining all the levers of power in Washington will result in significant regulatory relief for the industry that will lead to the construction of more homes and apartments.”
🔨 New home construction falls. Housing starts declined 3.1% in October to an annualized rate of 1.31 million units, according to the Census Bureau. Building permits fell 0.6% to an annualized rate of 1.42 million units.
🏢 Offices remain relatively empty. From Kastle Systems: “The weekly average occupancy increased three points to 52.7%, according to the 10-city Back to Work Barometer, the highest it has been since its post-pandemic record of 53% in late January. Occupancy rose in all 10 tracked cities, with nine cities increasing more than a full point. Chicago and Washington, DC both rose more than five points, to 56.1% and 49.7%, respectively. Houston, Dallas, and New York City all reached record highs, up to 62.8%, 61.4%, and 55%, respectively.“
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s October State Coincident Indexes report: "Over the past three months, the indexes increased in 35 states, decreased in nine states, and remained stable in six, for a three-month diffusion index of 52. Additionally, in the past month, the indexes increased in 30 states, decreased in 12 states, and remained stable in eight, for a one-month diffusion index of 36.
👍 Activity survey looks good. From S&P Global’s November U.S. PMI: “The prospect of lower interest rates and a more probusiness approach from the incoming administration has fueled greater optimism, in turn helping drive output and order book inflows higher in November. The rise in the headline flash PMI indicates that economic growth is accelerating in the fourth quarter, while at the same time inflationary pressures are cooling. The survey's price gauge covering goods and services signaled only a marginal increase in prices in November, pointing to consumer inflation running well below the Fed's 2% target.”
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.6% rate in Q4.
For more on the economy, read: The US economy is now less ‘coiled’ 📈
Putting it all together 🤔
The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
