S&P 500 to 5000?

S&P 500 to 5000? Barron's Leslie Norton recently sat down with Ed Yardeni, a legendary Wall Street economist and strategist who has enjoyed a front-row seat to the major events in economics and markets over the past 45 years. Known to clients and friends as Dr. Ed, Yardeni completed his economics PhD at Yale University in the 1970s, having studied under Nobel laureate James Tobin. A stint at the New York Federal Reserve Bank followed—under the presidency of Paul Volcker, before he became Fed chairman —then Yardeni moved to Wall Street. He rose to chief economist and chief investment strategist positions at several institutions including EF Hutton, Prudential Equity Group, and Deutsche Bank’s U.S. equities division. These days, Yardeni runs his own consulting and strategy firm, Yardeni Research. His daily briefings are required reading for many on Wall Street, covering the latest in economics, monetary policy, stock and bond markets, and even movie recommendations. Dr. Ed isn't shy about making predictions, and always backs up his assertions with plenty of data. He has been consistently bullish on stocks since 2009, during a huge multi-year rally across sectors. Now, he's thinking about productivity growth in “the Roaring 2020s,” the Fed's next move, and where the S&P 500 can rise to next. Here are a few highlights from his conversation with Leslie:  The market is up 10% since May 1, despite rising inflation and breakthrough cases of Covid-19. What happened to “Sell in May and go away”? It’s been a remarkable recovery. Earnings have rebounded dramatically. We could have a 70% increase in earnings during the second quarter. Companies responded so quickly to the pandemic by cutting costs on inventories, and profit margins recovered dramatically along with sales. Inventories are extremely lean. There’s lots of backlog orders, meaning lots of potential for the economy to continue to grow and generate more earnings for companies. When the market hit its low, the forward P/E [price/earnings] multiple of the S&P 500 dropped to 12.7. P/Es usually go a lot lower during recessions. But the Fed came in so quickly with ‘QE [quantitative easing] forever’ that the forward P/E surged to 22 by May 2020. The market anticipated that [QE] would revive the economy quickly. Since last spring the forward P/E has held its own around 22, which is extremely high historically, but now is warranted given Fed policy. What’s really driven the market is that earnings have been absolutely on fire. Now you’re forecasting 5,000 for the S&P 500. Why? I’m assuming that forward P/E will remain historically high at around 22, and that at the end of next year, analysts will anticipate 2023 earnings could be $230 per share. [Analysts on average expect the S&P 500 to post $200.51 a share in operating earnings this year and $218.92 a share in 2022.] Again, the market looks ahead. And when you multiply $230 a share by 22, you get 5060. I’ve been bullish since the bottom of 2009, and generally speaking, the markets kept pace. We’re probably seeing peak earnings growth in the second quarter. In the second half we’ll probably see 20% to 30% growth, and then slow down. This still means earnings will be rising to record-high levels, and that will drive the stock market higher. Why is a 22 P/E the new normal? Because there’s a tremendous amount of liquidity in the system. All the liquidity provided since the start of the pandemic hasn’t been spent. The money supply is roughly $5 trillion higher today than it was right before the pandemic. It’s equivalent to almost a year’s worth of nominal GDP. That’s unprecedented. A lot of liquid assets are just sitting there earning nothing and are available to keep bond yields relatively low and boost growth, earnings, and stock prices. What are you advising investors? Own companies that are either providing technology or using technology heavily—to run their businesses, to offset labor shortages, to increase the productivity of their workforce. Look at the profit margins of railroads: They have increased dramatically, partly because of consolidation, but also because of logistics programs that are dramatically increasing efficiency. Trucks are still viewed as low-tech, but they’re run by logistics programs on the cloud somewhere. Usually, I focus on a few sectors, but everything has been picked over. Nothing is particularly cheap. You really have to focus on where you think you’re going to get earnings growth, or unit sales or productivity. Clearly you want to continue to have technology stocks, and putting labels on [companies] is getting harder, because Alphabet [ticker: GOOGL] and Facebook [FB] are communications services, Amazon.com [AMZN] is consumer discretionary. Financials are spending a tremendous amount on fintech, and I think the yield curve is going to be beneficial to the financials. Anything you’d avoid? Don’t ask me about Bitcoin. I need earnings, dividends, rent, some income to discount. Governments are waking up to the [risks] cryptocurrencies pose to their monopoly control of the money supply. I don’t see much in the way of opportunities in the bond market, with yields [on 10-year Treasuries] at 1.2%. Read the rest of Leslie Q&A with Dr. Ed here.