Even though I trusted my math, I was not as confident in the economy at that time. For that reason, I applied a more conservative set of assumptions to arrive at my 5,500 forecast. But by the end of the third quarter, it had already exceeded that mark and was headed towards 6,000.
Major Differences
There are some major differences between where we are now compared to a year ago. The Fed stopped raising its policy rate last summer and made its first rate reduction in September. That was followed by two more cuts in November and December to bring the policy rate down by a full percentage point.
Also, a new presidential administration will be taking over in January. Not only does this represent a change in which political party occupies the White House, but a republican majority in the House and Senate imply that some major legislative changes will soon be in the offing.
I doubt president-elect Trump will get everything on his wish list, but some combination of tax cuts, import tariffs, and financial services deregulation is most likely on the way in 2025. How that affects the stock market remains to be seen, but on the whole Wall Street should like what it sees.
Not So Fast
The same expert (Ed Yardeni) who accurately predicted last year's earnings for the S&P 500 Index is projecting $285 in total EPS in 2025. Multiplying that figure by the long-term average PER of 20 for the index results in a year-end value of 5,700, which is less than where it ended 2024.
In other words, doing the math that way implies that the index will lose ground during the year to come. The problem isn't earnings, which Yardeni is projecting to increase by nearly 19 percent in 2025. The issue is the multiple assigned to those earnings, which mostly depend on how optimistic Wall Street is feeling about the economy.
Over the past five years, the forward PER for the index has vacillated between 20 to 30, with an average reading around 25. Applying that multiple to this year's earnings estimate results in an index value of 7,125, which is about 20 percent above where it ended 2024.
Once again, I feel that the result is overly optimistic, so I am cutting it back. Splitting the difference between the two outcomes results in a year-end value of 6,413 which sounds right to me, even though that equates to less than a 10 percent growth rate over 2024.
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