Last week, Wall Street their outlooks for the stock market in 2025.
As TKer subscribers know, I’m . Sure, I keep an eye out for these targets (see , , and ). 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 on the conservative side, strategists have actually nailed one important prediction: 2024 earnings.
According to , 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.
If the earnings have been coming through, then why have strategists been so off with their price targets?
As we discussed in the , assumptions about valuation multiples are where Wall Street’s calculations often go wrong.
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):
Differing assumptions about valuations are , and inaccurate assumptions about valuations are why those targets almost always go wrong.
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 .
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 , and it is .
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.
Thanksgiving dinner got cheaper. From the : “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.”
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.”
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.”
Unemployment claims tick lower. 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.
Gas prices tick lower. From : “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.”
Mortgage rates tick up. According to , 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 in the U.S., of which 86.6 million are and of which are . Of those carrying mortgage debt, almost all have , and most of those mortgages 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.
Home sales rise. 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.”
Home prices rise. Prices for previously owned homes rose from last month’s levels. From the : “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 : “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 . Building permits fell 0.6% to an annualized rate of 1.42 million units.
Offices remain relatively empty. From : “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.”
Most U.S. states are still growing. From the Philly Fed’s October 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 : “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.
Near-term GDP growth estimates remain positive. The sees real GDP growth climbing at a 2.6% rate in Q4.
The long-term outlook for the stock market remains favorable, bolstered by . And earnings are the .
Demand for goods and services is , and the economy continues to grow. At the same time, economic growth has from much hotter levels earlier in the cycle. The economy is these days as .
FILE – Federal Reserve Chair Jerome Powell listens to a question from a moderator during a Dallas Regional Chamber event in Music Hall at Fair Park Nov. 14, 2024, in Dallas. (AP Photo/LM Otero, File) ·ASSOCIATED PRESS
To be clear: The economy remains very healthy, supported by . Job creation . And the Federal Reserve — having — has .
We are in an odd period given that the hard economic data has . 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, is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could , thanks largely due to . Since the pandemic, companies have adjusted their cost structures aggressively. This has come with and , 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 .
Of course, this does not mean we should get complacent. There will — such as , , , , etc. There are also the dreaded . Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that and are developments that all long-term investors to experience as they build wealth in the markets. .
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. , and it’s a streak long-term investors can expect to continue.
