Last week, we raised our year-end S&P 500 target from 8,250 to 8,400. We are sticking with our 10,000 target by the end of the decade, though we might raise it. Our Roaring 2020s scenario is delivering even better S&P 500 earnings than we expected. FEMO (fabulous earnings momentum) is driving the stock market higher!
The S&P 500 is up 141.0% so far this decade, making it the sixth-best decade since the Roaring 1920s already (chart). If it rises to 10,000 by the end of the decade, it will be up 209.5%, the fifth-best decade. In other words, roaring decades are not exceptional for the stock market. (The S&P 500 fell during the 1930s and 2000s, and edged up slightly during the 1940s, 1960s, and 2000s.)
To reach 10,000 by the end of the decade requires an additional 28.5% (or 2,201 points) gain in the S&P 500. That’s roughly 7.5%-8.0% annualized price growth over the remaining 3.4 years of the decade.
If the S&P 500 hits 8,400 by the end of this year, that would make 2026 the fourth consecutive year of 15% or more annual gains (chart). The only previous streak of five consecutive gains occurred during the second half of the 1990s.
(1) Performance.Both the market-weight and equal-weight S&P 500 are at record highs (chart). The latter has been rising to new highs with less volatility than the former after both bottomed at the end of March.
We expected the bull market to broaden this year. So far, so good. The Impressive-493 continues to outperform the Magnificent-7, up 17.6% ytd versus 3.8% (chart). The S&P 500 as a whole is up 13.9%.
The Russell 2000 is also at a record high (chart). SmallCaps, which are the most economically sensitive corner of the stock market, suggest that investors are bullish on the economic outlook.
(2) Earnings. S&P 500 forward earnings always converges to the coming year’s consensus analysts’ earnings estimate by definition (forward earnings is the time-weighted average of the consensus estimates for this year and next). The 2027 consensus estimate is still rising. It is up to $410.25 (chart). We estimate that both forward earnings and the 2027 estimate will rise to $415.00 by year-end. That should take the S&P 500 up to 8,400, implying a forward P/E of about 20.2.
Q2 earnings rose 47.3% y/y, up from 19.0% for Q1. Industry analysts’ consensus earnings estimates imply that they expect 23.1% growth in Q3 and 27.3% in Q4 (chart). The Q2 number was inflated by the mark-to-market gains at Alphabet and Amazon that we have flagged. Without them, Q2 earnings growth slips to 25.7%. The Q3 and Q4 estimates carry no such distortion.
The forward profit margin is 16.5%, and the 2027 margin estimate is 16.6% (chart). This is unprecedented. (We impute margin estimates from analysts’ estimates for earnings and revenues.)
During the week of August 13, S&P 500 companies had positive 12-month percent changes in forward revenues and forward earnings of 88.5% and 86.1% (chart).
Forward earnings are rising to record highs across the S&P 500 LargeCaps, S&P 400 MidCaps, and S&P 600 SmallCaps (chart). FEMO is broad-based.
(3) Sentiment. The Investors Intelligence bull/bear ratio has climbed to 3.88 against its 2.60 average, while the AAII bull/bear ratio is at 0.92 versus its average of 1.18 (chart). Institutional bullishness is getting extended.
(4) Bonds.The Citigroup Economic Surprise Index has dropped sharply to 15.0, with the 10-year Treasury yield up just 7bps over 13 weeks (chart). Weaker retail sales and employment data drove the CESI down. Bond yields may ease from here, according to the CESI, even though most investors expect them to go higher.
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