The Best Investment Manager's Analysis: S&P 500 Hits Record Highs Amid Positive Developments
The S&P 500 reached new record highs this week, driven by easing geopolitical tensions, declining consumer inflation expectations, and reduced concerns surrounding the French elections. Israel restarted ceasefire talks with Hamas, leading to lower oil prices and alleviating uncertainty in the region. Additionally, the far-right National Rally party in France underperformed in recent elections, reducing the threat of major policy changes.
The market opened strong, surpassing 5,580 within the first hour but pulled back as attention turned to Federal Reserve Chairman Jerome Powell's upcoming testimony and the Consumer Price Index report on Thursday. The index ended the session with a small gain after drifting sideways in slightly positive territory.
According to Sevens Report, the S&P 500 has been trading above fundamentally justified valuations for much of 2024, but the market multiple math has become more favorable for bullish investors. Analysts are shifting their earnings expectations to 2025, projecting earnings of around $270 per share, significantly higher than the $243 estimate for 2024.
This shift to 2025 earnings has made the market more reasonably valued, with the "fair value" of the S&P 500 now in the mid-5,000 range. While this change does not eliminate the risk of a correction or pullback, it makes the year-to-date gains stickier in the event of a mild pullback.
Sevens Report notes that the stock market remains at aggressive valuations, but the change in earnings outlook makes current levels more justifiable. However, the risks facing the market have not changed, and a drop of 5% is possible if there is legitimate negative news on one of the four market influences.
In conclusion, the S&P 500's record highs are driven by positive developments and a shift in earnings outlook towards 2025. While the market remains optimistic, investors should be cautious of potential risks that could lead to a drop in stock prices. Understanding these factors is crucial for managing investments and financial decision-making.