We have centered on three eventualities because the begin of the last decade: a Twenties-style Roaring 2020s, a reprise of the Nineteen Nineties inventory market meltup, and a rerun of That ’70s Present with geopolitical shocks inflicting costs and to spike.
We’ve not needed to change our subjective chances of 60/20/20 for these three different outlooks. Nevertheless, Fed Chair Jerome Powell is forcing us to alter them now, to 50/30/20. In his August 23 Jackson Gap speech, he signaled that he was pivoting from an inflation hawk to an employment dove.
There was little doubt about his exceptional metamorphosis on Wednesday, when he should have satisfied his colleagues on the FOMC to decrease the federal funds charge (FFR) by 50bps moderately than 25bps. As we famous that day:
“The FOMC had its first dissent since 2022 at this assembly. Fed Governor Michelle Bowman voted for a smaller 25bps charge lower. However the Fed’s dot plot, up to date in its new SEP [Summary of Economic Projections], suggests dissent was a lot larger. Two members favor not decreasing charges once more this 12 months, and one other seven see only one 25bps lower later this 12 months.”
At Jackson Gap, Powell mentioned all of it when he mentioned,
“We are going to do every thing we are able to to help a powerful labor market as we make additional progress towards worth stability.” In the present day, inventory costs soared to new document highs after Powell & Co. delivered Wednesday’s 50bps FFR lower and signaled within the SEP many extra to return till the FFR falls to 2.9%, which they presently deem to be the long-run impartial rate of interest (chart). At his presser on Wednesday, Powell delivered the inventory market to the Promised Land, the place “power within the labor market could be maintained in a context of average progress and inflation shifting sustainably right down to 2%.”
Traders exuberantly shouted “Halleluiah” on the times that adopted.
The query is whether or not exuberance is shortly turning from the rational selection to the Nineteen Nineties irrational model. ahead earnings per share ought to proceed to rise to new document highs, particularly if the Fed’s aggressive easing heats up the financial system, which has been rising at a gradual and average tempo within the face of Fed tightening (chart). 
So earnings ought to proceed to justify rational exuberance. The issue is valuation.
Warren Buffett has been elevating money most likely as a result of his Buffett Ratio (measured because the S&P 500’s worth index to ahead gross sales) is in record-high territory, at 2.83 throughout the September 19 week (chart).
Considerably much less irrational is the S&P 500’s ahead P/E (chart). It is elevated at 21.1. Nevertheless it is not in document territory, but. Its divergence with the S&P 500 ahead price-to-sales ratio is attributable to the index’s rising revenue margin inflicting earnings to rise quicker than gross sales.
So what about our S&P 500 inventory worth targets? We’re nonetheless anticipating S&P 500 earnings per share to be $250 this 12 months, $275 subsequent 12 months, and $300 in 2026. Our S&P 500 ahead earnings projections for the ends of 2024, 2025, and 2026 stay at $275, $300, and $325. We’ve got much more confidence in these estimates now that the Fed is so dedicated to averting a recession.
We have been utilizing a ahead P/E of 21.0 to get our year-end S&P 500 targets of 5800, 6300, and 6800 for 2024, 2025, and 2026.
We have determined to stay with these targets, however we acknowledge that the chance of a meltup has elevated, as famous above. In a meltup state of affairs, the S&P 500 might soar to above 6000 by the tip of this 12 months.
Whereas that may be very bullish within the close to time period, it might enhance the probability of a correction early subsequent 12 months.
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