I would like to try some of whatever industry analysts are smoking. You can compare my earnings forecasts to their consensus estimates on a weekly basis in YRI S&P 500 Earnings Forecast on our website. I say “tomato.” They say “tomahto.”
My earnings-per-share estimate for 2018 is $155.00 (up 17.4% y/y). The analysts continue to up the ante and are currently at $160.40 (up 21.5%). My estimate for 2019 is $166.00 (up 7.1%). Theirs is $175.72 (up 9.6%). Perhaps the analysts are just high on life.
They could be right about 2018, especially since they just boosted their Q1-2018 sights based on results reported so far during the earnings season. At the same time, they have been conservative on the remaining quarters of this year. Their growth estimate for next year seems too high to me since I expect 2019 earnings growth to settle back down to the historical trend of 7%.
You can drive a truck between my earnings estimates and theirs. However, both suggest that the stock market is likely to be at new record highs by the end of this year. As the year progresses, the earnings estimate for this year will be less relevant, while the estimate for 2019 will be more so. By the end of the year, the market will be discounting analysts’ consensus earnings estimate for 2019, not my estimate.
However, analysts tend to be too optimistic and often lower their estimates as earnings seasons approach. So let’s split the difference between my estimate and their current estimate for 2019. That would put consensus earnings for 2019 at roughly $170 per share by the end of this year. Now let’s apply forward P/Es of 14, 16, 18, and 20 to estimate where the S&P 500 might be at year-end:
2380 (down 12.3% from Friday’s close)
2720 (down 0.3%)
3060 (up 12.8%)
3400 (up 25.3%)
I pick the third scenario as most likely. My year-end target for the S&P 500 remains 3100. In my scenario, inflation remains subdued around 2.0% for the foreseeable future. Real GDP grows between 2.5%-3.0% this year. The Fed raises the federal funds rate to 2.25%-2.50% by the end of the year. The 10-year Treasury bond yield trades between 3.00% and 3.50% over the rest of the year. Investors conclude that interest rates aren’t likely to move much higher in 2019 and increasingly believe that the economic expansion might last beyond July 2019, when it will be the longest one on record. Also fears of a trade war are likely to subside as the year progresses. (For more on “Predicting Corporate Earnings,” see Chapter 13 of my new book, Predicting the Markets: A Professional Autobiography.)
