Stocks have started the year with a nearly uninterrupted run—one that has us imagining just how high the market can go.
The Dow Jones Industrial Average climbed 507.32 points, or 2%, to 25,803.19 last week. The Standard & Poor’s 500 index rose 1.6%, to 2786.24. The Nasdaq Composite gained 1.7%, to 7261.06. All three closed at record highs.
To put the recent gains in perspective, the S&P 500 has now gained 4.2% in just two weeks of trading, a pace that would have it triple by the end of the year. That’s well beyond most analyst forecasts—the Wall Street consensus calls for it hitting 2893 by the end of the year—and, let’s face it, unsustainable.
But how high could the S&P 500 really go? Around 3000 would be a reasonable guess, if earnings are any guide. Remember, earnings season got underway last week, with JPMorgan Chase (ticker: JPM), Wells Fargo (WFC), and BlackRock (BLK), among others, reporting. And the numbers seemed solid, especially with an added boost from tax cuts. JPMorgan CEO Jamie Dimon, for one, practically crowed about the benefits of the lower corporate rate. “Much of it will fall to our bottom line in 2018 and beyond,” he said on a conference call with investors.
Wall Street shares his enthusiasm. RBC Capital Markets strategist Lori Calvasina argues that with the benefit of tax reform, the aggregate earnings per share of the benchmark could grow 17% in 2018, to $155. The valuation the market is willing to put on those earnings, however, might stay where it is, or even decline—something that historically happens when the Federal Reserve is tightening and short-term interest rates are rising—putting the S&P 500 at 3000, up 12% on the year, Calvasina says.
“I’m calmly bullish,” she adds.
Investors, for their part, are just plain bullish. The American Association of Individual Investors survey showed that 48.7% of respondents use that word to describe themselves, a big drop from the previous week’s 59.8%, but still well above the historical average of 38.5%. And that optimism may be translating into action. John Augustine, chief investment officer at Huntington Private Bank, notes that flows in equity mutual funds and exchange-traded funds have been picking up. “The market may have a new fuel source,” he says.
Like RBC’s Calvasina, Julian Emanuel, chief equity and derivatives strategist at BTIG, expects the S&P 500 to hit 3000 by the end of the year. He also published an upside case that could see the S&P 500 hit 3400 by year end, a 22% gain from Friday’s close—a gain that isn’t propelled by animal spirits or a massive pickup in growth. Instead, it’s more of the same: The U.S. economy grows at a 2.5% to 3% clip, interest rates don’t climb too much, and volatility remains low. “If those numbers remain as placid and predictable as 2017, you get to 3400,” Emanuel says.
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