Where Will the S&P 500 Be in a Year?
How high can US equity markets go?
The S&P 500 has entered uncharted territory of late and is flirting with the 2,400 mark. The Dow Jones Industrial Average (DJIA), meanwhile, just breached 21,000 and shows no signs of faltering.
The S&P 500 has been on an especially bullish run of late. Since 8 November 2016, the index is up about 12%.
Many have attributed the recent performance to the so-called Trump effect, as investors anticipate lower taxes and reduced regulations under President Donald Trump, while presumably discounting the potential for trade wars or other geopolitical risks. This turnabout is especially curious given all the dire warnings in the run-up to the election.
The dour predictions juxtaposed with the subsequent surge suggest something of a bipolar disorder and reaffirm the inherent fallibility of assigning a political explanation to market performance.
Nevertheless, whatever the cause of the recent bullish streak, some see signs of irrational exuberance in the S&P 500’s rapid ascent. After all, the average Wall Street estimate pegged the index closing out 2017 at 2,364. It’s barely March, and that figure has already been eclipsed.
So what’s going on? Are we in the midst of a stock bubble, in the early stages of a historic boom, or somewhere in the middle?
For a sense of the consensus on these questions, we conducted an informal poll of CFA Institute Financial NewsBrief readers for their perspective on where the index will be a year from now.
What is your expectation for the total return of the S&P 500 index over the next 12 months?
Over two-thirds of the 991 respondents (67%) anticipate the S&P 500 is not due for a major correction one way or the other and expect it to rise or fall between 10%.
What’s the major takeaway from this? Most investors think that the index is more or less appropriately priced, that it isn’t in either boom or bubble territory.
The story at the extremes is also illuminating.
One in five respondents see the index rising by at least 10% over the next year compared to only 13% who see it falling by 10% or more.
Put another way: There are more bulls than bears.
But go further out on the margins and the story is slightly different: 6% think the index is due for a major downward correction in excess of 20%. That compares to only 2% who see the index expanding by 20% or more.
So ultra bears outnumber ultra bulls.
These data points aside, the broad consensus is that a year from now the S&P 500 won’t look that much different from what it does today.
So to return to the opening query: How high? Probably not much higher and maybe even a bit lower.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Hello Paul
Thank you for the interesting article.
My two cents – money coming into the market is a composite of money seeking safe haven and money from boomers seeking an outlet from inflation.
So if anything the market is undervalued, like the real estate market in Toronto (long term demand shifts – in economic speak).
I take this opportunity to wish you an enjoyable weekend
Savio
the indices will always outperform the stocks. The indices can be modified taking out losers and laggards and replacing them with momentum stocks that can elevate in the short term.
Whatever happened to Kodak, Polaroid, and others taken out over the years.
So always bet on the indices….when you have a chance.
Dr. L Brody, you are mistaken regarding the S&P index. It is comprised of the 500 largest companies by market value. Companies do not fall off the list because simply because someone decides to take a loser off and add a winner – it happens automatically.
As far as Kodak, Polaroid and others “taken out” of the index – they fell off the index because their value fell so much.
What should frighten you today is that because the S&P 500 index is a weighted index with the more valuable (again, based on market cap) contributing more, Apple, Microsoft, Facebook, Amazon, and Google account for about 13% of it.
“Betting” on the index is a fools game, because it employs absolutely no analysis – the index fund will mindlessly buy and sell the index component shares across the board no matter what the fundamentals or performance of the company looks like. The operate on nothing more than money flow in and out. Because so many “investors” have now accepted this foolish approach, it’s like an upward spiral…the more the index goes up, the more people are pouring money in, the fund buys shares, the index goes up…lather rinse repeat.
Unfortunately, this only works so long as money inflow continues. It is the greater fool approach at work. As the index goes higher, it is enticing more folks to put money in. However, as more folks are putting money in, everything is becoming more overvalued. When the music stops playing, investor sentiment changes, and we see money outflow, the index fund works just as well going down. Unless you believe that Apple, Microsoft, Facebook, Amazon, and Google are going to go up forever the index funds will be retreating the moment we have a correction in the technology sector.
What most folks who are actually investors and have been around the markets for more than the past decade also know, is that when technology stocks go into a slump, it routinely goes on for years and is very brutal when it comes.
Long story short – most folks mindlessly throwing their money into index funds really have no idea of what they’re doing, the risks involved, or how quickly their investments can be cut in half.
I have always been interested in investing my money so that I can get a better return on my money than the banks can give me. I think that investing in stocks would definitely help me to make sure that I will be able to have a good retirement in the future so that I will be able to retire earlier with more money in my retirement. Like you mentioned, the S&P 500 has one of the most accurate of the market out there so it is something that you can trust as something to go off of.