Eddy Elfenbein is a great Tweeter under @EddyElfenbein. Follow him and reap the wisdom. One reason I like his Tweets is that they are short and to the point.
On Sunday, January 5th, 2014, Eddy tweeted that of the 20 Wall Street Strategists that put up a prediction for ’14, the “average” of the 20 resulted in an expected 5.8% increase in the SP 500 this year. The smallest expected rate of increase since 2005.
What did the SP 500 return in 2005 ? 4.91%, so in that year the strategists had it right.
The point is that a lot of prognosticators have now turned less bullish for ’14, understandable given the 30% SP 500 return in 2013.
However when we made our first pass at 2014 SP 500 return scenario’s one element that impressed me was that it wouldn’t take too much “extreme” numbers to result in the SP 500 generating a high teens, 20% return in 2014.
Here is the math:
Current (as of 1/3/14) ThomsonReuters top-down SP 500 EPS estimate for 2013: $109.05
The bottoms-up estimate for 2013 is $109.13, while I think by the time we get to late March and q4 ’13 is fully reported we have a final ’13 EPS of $110;
Expected SP 500 EPS growth in 2014 is 8%, while I think the SP 500 can do 10% EPS growth in 2014;
$110 * 10% growth ($110 * 1.1) = $121 per share in expected SP 500 EPS in 2014.
The SP 500 closed at 1,848.36, on 12/31/13.
At 18(x) $121 EPS, y/e SP 500 target is = 2,178, which is 17.8% capital gain for SP 500 in 2014
At 19(x) $121 EPS y/e SP 500 target = 2,299, which is 24.38% capital gain in 2014
At 20(x) $121 EPS y/e SP 500 target = 2,420, which is a 30.9% capital gain in 2014;
The key metric to this scenario is that the SP 500 has grown at roughly 2(x) P.E-to-Growth rate in the last year, usually above 2(x).
10% EPS growth at 2(x) PEG is 20(x) year-end ’14 earnings. That is a 30% return.
The combination of both “earnings growth” and p.e expansion produces the SP 500 annual return.
Our official forecast is for 5% – 15% SP 500 return in 2014. The economy and earnings are fine, but worries over the Fed and rising rates will suppress returns in my opinion, ala 1994.
However like a lot of strategists, we could wind up with a too conservative forecast.
Hope you aren’t offended by the assumptions: it is pretty doable math. 10% earnings growth and 20(x) multiple. (I’m practically apologizing for being bullish.)
So much depends on the Fed and interest rates.
Trinity Asset Management, Inc. by;
Brian Gilmartin, CFA
Portfolio manager