SPXV - S&P500 2024: A More Optimistic Viewpoint

2023-12-18 22:30:30 ET

Summary

• S&P 500 is projected to reach 5,300 by the end of 2024, with an 8% increase in EPS and a forward P/E of 21X.
• The Magnificent 7+2, a group of technology-driven stocks, will continue to drive the overall value of the S&P 500.
• Most public companies are focused on improving operating margins, leading to higher EPS growth than revenue increases.
• And Momentum buyers will increasingly jump into the stock market.

So far, most articles forecasting the S&P 500 ( SP500 ) ( SPY ) index for the end of 2024 have been conservative, pessimistic, and downright realistic. I felt that there needs to be a more optimistic view for consideration. As those of you who follow my articles know, I'm generally optimistic and a big believer that technological advances will drive the stock market. So, here is my optimistic forecast for your consideration.

As of November 30, 2023, the S&P was 4,567.80 with a forward P/E of 19.53 times forward earnings (S&P Factsheet), which indicates a $233.89 EPS at that time. My granted optimistic forecast for the end of 2024 is 5,300. This assumes an 8% increase in EPS to $252.60 and a forward P/E of just under 21, actually 20.98. While at 16% from that baseline, 5,300 is a smaller increase of 11.7% from the $4,744 on December 18, 2023. And this is less than the increase for 2023 of more than 19%. Nevertheless, it requires some justification.

I'll cite three reasons for this optimistic increase:

1. The Magnificent 7+2, which constitutes more than 30% (and climbing of the S&P 500, is on a roll and will continue for the next two years.
2. Most public companies, in my opinion, have an increased emphasis on improving operating margins, so increases in EPS will exceed revenue increases.
3. P/E ratios, although currently high, will continue to increase with momentum investing as more money flows into the stock market in 2024 from money market funds as interest rates decline, and popular stocks continue to look more attractive.

Impact of The Magnificent 7+2

A select group of stocks drive the overall value of the S&P 500 with a weighting of more than 30% and increasing. And they are projected to keep growing profits. In addition to the Magnificent 7, I added Broadcom and Eli Lilly because they are in the top 12 of the S&P 500 and two of my favorite stocks.

All of these stocks are technology-driven, and I'm optimistic (since I focus on technology strategy) that they will continue to grow profits and attract even more investors.

The following table illustrates the prospects of increasing earnings for these nine companies using the EPS increase estimates for 2024 and 2025 from the Earnings Estimates pages for these stocks on Seeking Alpha:

Of these estimates, Apple is understated because I believe in the Visions Pro and other revenue drivers. I'm not as optimistic about Tesla, but these offset.

You can do the math of the impact of these nine companies on the overall S&P 500. If they constitute 30% of the index and increase by 15%, while the average of the other 70% increases by 5%, you get an overall increase of 8%. 20% and 3% also work to 8% overall.

Increased Emphasis on Improving Operating Margins

This is my expert opinion, but most public companies' CEOs/CFOs and their boards will not settle for less than EPS increases of 5%-7% or less in 2024. They are conscientious of a minimum 5% hurdle rate of treasury investments in 2023. They will accept conservative revenue plans but expect expense reduction to boost earnings per share. Having served on four public company boards, I understand this dynamic very well.

Expense reductions are very feasible in 2024. Many companies have already indicated expense reductions in 2023 and expect more in 2024. Many companies realize they over hired in the pandemic swings and are reducing headcount and slowing new hires. Some want to gain productivity from what they saw in the work-from-home move. Improvements in technology, especially the opportunities of generative AI to improve productivity in sales, marketing, and administration, make expensive reduction feasible.

Momentum Investors Will Drive Higher P/E Ratios

Momentum Investors will drive up the P/E of stocks, particularly some of the more popular technology ones, as they move money from money market funds and short-term bonds into stocks. They will want to jump into these stocks as they increase and not miss out on the opportunities.

The theory of momentum investors is based on the concept of momentum in the financial markets, which refers to an asset's price tendency to continue moving in its current direction. Momentum investors focus on stocks that have shown a strong trend in price movements and often buy stocks that have already demonstrated significant price increases, expecting the upward trend to continue.

Momentum investors often rely on technical analysis and quantitative models to identify trends and momentum in asset prices. They use historical price data and various technical indicators to make investment decisions. The momentum strategy also taps into the behavioral biases of investors. It is partly based on herd behavior, where investors tend to follow the crowd in buying rising assets and selling those falling. Some analysts argue that momentum investing challenges theories of efficient markets, and that’s probably true.

Momentum investors can significantly impact stocks' Price-to-Earnings (P/E) ratio, primarily through their influence on stock prices. Momentum investors often buy stocks that are already experiencing an upward price trend. This increased demand can drive the stock prices even higher. A higher P/E ratio indicates that investors are willing to pay more for each dollar of earnings, often due to expectations of future growth or continued positive price momentum. If momentum investing leads to excessive demand for specific stocks, it can result in overvaluation. Momentum investing can sometimes be driven more by market sentiment and speculation than fundamental analysis. This behavior can inflate stock prices and P/E ratios, especially in "hot" sectors or stocks that become investor favorites. In such cases, the P/E ratio can reach unusually high levels, which might not be sustainable in the long term. My forecast for the 21 P/E ratio for the S&P 500 may be low, with dramatically higher P/Es in some of the larger stacks. However, it's likely that P/E may be overvalued and drop in 2025.

Potential Risks

Of course, there are many risks to my forecast of 53,00 for the S&P 500. We could go into a recession. The volatile war situation could get much worse. Inflation could jump back up. The elections could bring fear and uncertainty to the stock markets.

So please remember that I deliberately ignore these and assume at your own risk using my optimistic forecast.

Conclusion: 5,300

In conclusion, my optimistic forecast for the S&P 500 is 5,300 on December 31, 2024. This assumes an annualized Q4/24 EPS of $252.60 and a forward P/E of 21. This is driven by the continued momentum of the Magnificent 7+2; EPS increases much greater than revenue increases across the S&P 500; and the impact of momentum investors jumping into the market.

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