What’s the Magic Number for the S&P 500?
One input to arriving at the answer will become clearer as March-quarter earnings season unfolds.
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While listening to Bloomberg Radio this afternoon, host Tim Stenovec asked a market strategist what she thought the right “number” could be for a bottom in the S&P 500. A timely question, no doubt, but the answer she offered was “it depends,” and that ties into one of the topics we’ve been yammering about for the last few weeks: S&P 500 earnings expectations.
In "The Week Ahead" section of last Friday’s Weekly Roundup, we discussed how there has been little movement in consensus EPS expectations for the June quarter and full-year 2025. Some will blame Wall Street analysts for being a step or two behind, but as the last few days have shown, fast-moving developments can make a tough calculation even more complicated.
Cuts and Revisions
We have seen Wall Street firms cut their S&P 500 price targets, the latest being Evercore ISI, which reduced its target to 5600, down from one of the highest on the Street at 6,800. Oppenheimer also reduced its target for the benchmark index, to 5950 from its prior 7100, and BofA cut its to 5600 from 6666. Previously, Barclays dialed its target back to 5900 from 6600.
Alongside those price target cuts, some firms have their revised 2025 S&P 500 EPS forecasts. Compared to the $269.49 consensus figure from FactSet we shared in Friday’s Roundup, Evercore ISI is now calling for the S&P 500 basket to deliver EPS of $255 this year, while Barclays sees $262, down from $271.
What’s dragging those EPS figures lower? Multiple tailwinds, including slower consumer spending, the uncertainty impacting business spending, persistent inflation, and of course tariff concerns.
Sizing Up the Targets and Forecasts
Sizing up those revised S&P 500 price targets and 2025 EPS forecasts, the implied P/E multiple based on Evercore ISI’s figures is 22x, while Barclays is a wee bit higher at 22.5x. Granted, that is down from more than the 24x multiple associated with Barclays’ 6600 S&P 500 forecast, but it is still above 20.8x, the average peak P/E for the S&P 500 over the 2015-2024 period excluding 2020 for the pandemic.
Viewed in a slightly different way, if we examine Barclays’ 5900 target against that 20.8x average peak P/E multiple it says the S&P 500 has to deliver EPS near $283 this year, something that as of now seems very unlikely.
Now let’s do the same with the revised S&P 500 target from Evercore ISI. Dividing that 5600 figure by 20.8, we get an implied S&P 500 EPS of $269, which was the market consensus as of Friday. But we know that figure is going to come down if only to reflect the recent forecast declines for this year. While the target of 5600 sounds wonderful given its upside from current levels, the analysis we shared suggests it too may be a tad aggressive based on the current landscape.
If we look back over the last 30 years to when the S&P 500 delivered slow to no earnings growth or even EPS declines, the peak P/E multiple spans 20.0x-20.5x. Knowing this, the next question we need to answer is what is the S&P 500’s EPS likely to be this year?
That would give us a potential S&P 500 target level, and doing a similar analysis against the 16.5x average trough P/E multiple over the 2015-2024 period (excluding the 2020 pandemic) would give us an idea of where the S&P could bottom out. For example, using Evercore's $255 figure points to 4207 on the S&P 500. The $262 figure from Barclays kicks out 4323.
Here's the thing: As we have a better indication of S&P 500 EPS growth prospects, we can further refine what potential P/E figures should look like to gauge potential upside and downside levels for the S&P 500 rather than using a blunt instrument. While could hazard a guess, as there are many known moving pieces, some, like retaliatory European Union tariffs, may or may not fall into place.
On the one hand, we know the duration of tariffs will be a big factor as will their cumulative size. The coming days and the revised forward guidance they bring will help us game things out, but admittedly the one big known unknown that will be hard to model is what all this means for consumer and enterprise spending in the months ahead.
Bottom Line
The bottom line near-term is that as we move through March-quarter earnings season, we’re going to see Wall Street firms re-jigger their S&P 500 EPS forecasts. As that happens, more than likely it will re-ignite questions over what the appropriate market multiple should be, and that could trigger another wave of S&P 500 price target adjustments.
However, we also have to realize that trade deals, the rollback of Trump tariffs, or even the passage of Trump tax cuts would lead to another recalibration of S&P 500 EPS expectations. That would mean we would have to revisit the above analysis as well.
We’ll be watching this unfold over the next several weeks to identify the revised EPS growth benchmark we use to help weed out candidates for the TheStreet Pro Portfolio and Bullpen. And alongside technical and other indicators it will also be another way for us to gauge market sentiment.
