Wall Street analysts are forecasting the S&P 500 to trade at 4,987.28 over the next 12 months, close to 30% higher than its June 23 closing.
That’s according to a recent study from FactSet, which monitors analyst earnings estimates and projections for the S&P 500 companies.
The bullish projections for the benchmark equity index come at a time of a challenging macroeconomic environment of record high inflation, rising interest rates, and a strong dollar, which do not bode well with S&P 500 performance. It has led Wall Street analysts to cut earnings estimates in line with declines in the overall market.
“In conjunction with the decline in the price of the S&P 500 since the start of the year, industry analysts have also been lowering their target prices on S&P 500 companies in recent months,” said John Butters, vice president and senior earnings analyst at FactSet. “Since peaking at 5,344.26 on January 20, 2022, the bottom-up target price for the S&P 500 has declined by 7% to 4,987.28 on June 23, 2022. “
That’s the first time analysts have lowered bottom-up estimates for the S&P 500 below 500 since August 2021. Bottom-up estimates are the sum of the median target prices (based on company-level estimates submitted by industry analysts) for all the companies in the benchmark index.
But with the S&P price dropping in line with these estimates, markets have discounted the bad news. Thus, they could bounce back over the next 12 months.
“However, it should be noted that the bottom-up target price of 4,987.28 on June 23 was still 31.4% above the closing price of 3,795.73 on the same day,” added Butters. “Thus, even with the recent decrease in the bottom-up target price, industry analysts still believe the value of the index will increase by more than 30% in the next 12 months.”
Which sectors are offering the best appreciation potential from these levels? The industries that have been mostly beaten up during the recent market sell-off include Communication Services (+42.6%), Consumer Discretionary (+40.2%), and Information Technology (+36.5%).
As for individual stocks, Caesars Entertainment, Dish Network Corporation, Bath & Body Works, Carnival Corporation, Penn National Gaming, Inc., and the Royal Caribbean Group are on the top of the list of the companies with the highest appreciation potential.
How accurately have analysts used bottom-up earnings estimates to make projections for the S&P 500? Reasonably accurate and on the conservative side., according to Butters.
“Over the past five years, industry analysts have underestimated the price of the index by 2.1% on average (using month-end values),” he said. “Over the past 10 years, industry analysts have underestimated the price of the index by 0.2% on average (using month-end values).”
Still, as the Wall Street disclaimer goes, past performance is never a guarantee for future performance. So, investors should continue to cast a wary eye on macroeconomic challenges that could push the market in the wrong direction.