Market Watch
S&P 500 Outlook: Positive in Equities, as long as Earnings do not collapse…
All in all, the US economy is not outperforming, however is not falling off a cliff either; so, remains resilient, as has been the case over the recent years. Valuations are above average figures, signalling investors should be cautious. Even so, the forward growth should accelerate during the second half, namely in the US. Assuming, over the coming six months, a stable forward PE and stable forecasts, the S&P500 could finish the year at 6350; meanwhile as growth accelerates, investors could demand a higher PE, for instance 6500, would mean an implied forward PE 21.6x; almost in line with the figures recorded by year end 2024. So, remains easy to be bullish on equities, assuming the current environment, i.e. no major negative surprises on earnings.
Source: Federal Reserve Bank of Philadelphia
Source: Federal Reserve Bank of Philadelphia, AS Ind. Research
Source: Consensus, AS Ind. Research
Disclaimer
US Economy
1 – The US economy remains on the weak side, nevertheless resilient. Two relevant Fed surveys about the US economy were released last week, “Empire Sate Manufacturing”, NY Federal Reserve Bank and “Manufacturing Business Outlook Survey”, Philadelphia Federal Reserve Bank (please see graphs below). Both point to weak activity vs. prior data, the Phily Fed Current Conditions remained at -4, unchanged from May, while the NY Empire State Manufacturing Current conditions went down to -16 vs. -9.2 in the month before, the “Future Business Activity” are now positive in both indices. The weekly economic index from the Dallas Fed, that provides a signal of the state of the US economy, remains around 2%YoY and 2QtD average data slightly above 2% not very different from 1Q25 data.Source: Federal Reserve Bank of New York
Source: Federal Reserve Bank of Philadelphia
Source: Federal Reserve Bank of Philadelphia, AS Ind. Research
S&P 500 Earnings
2 – “Earnings growth consensus, proxy” in the last three/four weeks have been stable or reviewed slightly upwards, namely in the US, after a period of adjustments (please see table below).Source: Consensus, AS Ind. Research
S&P 500 Valuations
3 – Valuations remain under pressure, US forward PE, above 21x and Euro Area around 14.5x. Both above short and long-term averages. A similar, conclusion regarding the Equity Risk Premium (ERP), a measure that takes in consideration, apart from earnings, interest rates and inflation, current figures below short and long-term averages
* Forward Multiple – Basically the current index value divided by the 12 months forward earnings consensus (proxy). Historically, lower figures, namely below average, could indicate the stock market is undervalued and vice-versa. It’s easy to calculate, straightforward, however it does not take in consideration the level of interest rates
Source: Consensus, AS Ind. Research
* ERP – the implied equity risk premium is our preferred measure to value the equity market. Basically, is a Dividend Discount Model, based on several premises that we keep over time. The historical data allows us to have a quantitative opinion regarding the equity market. The ingredients are, earnings consensus proxy, interest rates, 10-year government bonds and finally, inflation data, namely core data. Higher figures vs. historical data indicates the stock market could be undervalued and vice-versa.
Source: Consensus, AS Ind. ResearchFinal Thoughts
All in all, the US economy is not outperforming, however is not falling off a cliff either; so, remains resilient as has been the case over the recent years. Valuations are above average figures, signalling investors should be cautious. Even so, the forward growth should accelerate over the second half, namely in the US, ceteris paribus, mainly a time-weighted average effect, as 2026 earnings growth is higher than 2025. Assuming, over the coming six months, a stable forward PE, currently at 21.1x and stable forecasts, the S&P500 could finish the year at 6350; meanwhile as growth accelerates, the forward PE could expand, for instance 6500, would mean forward PE at 21.6x; almost in line with the figures recorded by year end 2024. Finally, small adjustments on growth, should not be enough to upset the market, only small multiples contraction. So, remains easy to build a bull story on the equity markets, assuming the current environment, i.e. no major negative surprises on earnings.Disclaimer
This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible for its use, including for any losses or damage that may, directly or indirectly, derive from. The data herein disclosed are merely indicative and reflect the market conditions prevailing on the date they were collected. Thus, its accuracy and timing must absolutely be confirmed before its usage. Any alteration in the market conditions shall imply the introduction of changes in this report. This information/this opinion may be altered without prior notice and may differ or be contrary to opinions expressed, because of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. This information is not an offer to sell or a solicitation to enter any deal or contract. It consists of data compiled by or of opinions or estimates from AS Independent Research and no representation or warranty is made as to its accuracy or completeness. Reproduction is not allowed without AS Independent Research permission.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. 3Comma Capital does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. 3Comma Capital does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
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António Seladas, CFA
3 Comma Capital Blog Contributor
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This post was written in collaboration with António Seladas, CFA. António founded AS Independent Research and provides expert research to clients.
