Looking out over the next 12 months, our S&P 500 price target is 7,750, which implies a gain of nearly 14% from the pre-Thanksgiving close.
As our regular listeners are well aware, we are all about the math when it comes to our target. 7,750 is an approximation of the median and average of five models that we’re using. Here’s a rundown:
- On our Sentiment model – Net bulls on the AAII survey have been falling, hitting -9.4% on the four-week average last week. That indicator is now between 1 and 2 st dev below the LT average. Net bulls may have more room to drop near-term but current levels are consistent with a 15% 12 month forward return on the S&P 500.
- On our Valuation model – our model projects a Trailing PE for SPX at the end of 4Q26 based on consensus assumptions for CPI in the mid 2% range, several more cuts from the Fed and 10-year yields around 4%. We marry that up with the bottom-up consensus trailing 4Q EPS estimate of $311 for the S&P 500 over the same time frame. Our model points to almost 8,000 as fair value for the S&P 500 – the most bullish signal from the five models.
- On our stocks vs. bonds model – the earnings yield of the S&P 500 remains slightly below the 10-year Treasury yield, and the gap between the two is in a range typically followed by a gain in the S&P 500 of more than 14% over the next 12 months.
- On our economic model – we look at how the S&P 500 performs on a 12 month time frame when real, quarterly GDP on a yr/yr basis is in different ranges dating back to 1990; both consensus and RBC Economics are in the 1-2% range for 4Q26 which points to a 5.7% return in the S&P 500 or around 7,200 – the least constructive of our five models.
- On our Fed model – this is a new test in our toolkit; we look at how the S&P 500 performs on a 12-month time frame when Fed hikes or cuts are in certain ranges during a 12 month window; when cuts over a 12 month period come in between 0 and 1%, the average return in the index has been a little more than 13%.
- And one programming note - we have adjusted our methodology. Our 7,750 forecast is a 12-month forward price target, and going forward we will continue to update our price target on that time frame as opposed to a static December 31st number. In this context, some of our models have also been adjusted to reflect a rolling 12-month time frame as opposed to a calendar year. Going forward, we plan to update our 12 month forward price target monthly.
Some of the key potential headwinds/downside risks and tailwinds/upside risks that we’re monitoring.
The first of these is the Economy – if GDP comes in better than currently expected, our GDP model indicates that the S&P 500 returns more than 10% on averages when growth is in the 2-3% range, more in line with our other models. By contrast if GDP comes in well below expectations, our GDP model reminds us that when growth is in the 0 to 1% range the S&P 500 typically falls more than 9%.
Another issue we’re monitoring is interest in geographical diversification – we think this headwind will persist. Flows have been strong to global ex U.S. funds this year and recently.
- Moreover, looking across global developed markets, EPS revisions have been stronger in the U.S. but are fading from peak and are recovering for Europe.
- Meanwhile, valuations are expensive across most major regions and countries in global developed markets but look worst in the U.S. by a significant margin.
And the Midterms – This is something we’re watching; from the summer to mid-November, the S&P 500 was positively correlated with expectations Republicans will keep control of both chambers in the midterms, that expectation took a hit at the same time the S&P 500 experienced its 5.1% pullback.
In terms of positioning, we are tactically leaning into the rotation from Growth and the biggest market cap names into Value and the broader market, but think a shift in EPS growth leadership is needed for it to stick.
The case for rotation is supported by AI jitters among both institutions and retail investors along with a couple of the more popular charts in our deck.
- We highlight how the performance of the top 10 names has returned to Tech bubble highs relative to rest of the market, and how the gap between top 10 names and the rest of market on marketcap share vs. net income share is close to past highs.
- Additionally, flows favor Value over Growth within the U.S. on EPFR’s data.
Earnings are really the key, however, for the sustainability of a leadership rotation. We are still seeing slightly stronger EPS growth forecasts for Mag 7 than rest of the market; Earnings revisions are also still stronger on top 10 names and growth than rest of mkt and value, though their dominance is fading.
Rotation is in the air right now and probably lasts a bit longer, but the tug of war between Growth and Value and top market cap names and everything else seems likely to return until earnings dynamics flip.
We have become more willing to add to Small Caps in the near term but are not getting too comfortable yet.
We see more positives for small caps than we did a few months back – another rate cut rental trade seems to be picking up, on valuation the next twelve months P/E of the Russell 2000 is close to average, the Russell 2000 also has faster net income growth embedded in consensus forecasts for the next year, and the rate of upward EPS estimate revisions recently hit a new high for Russell 2000 but is still well below past highs for the S&P 500. We also like the composition of the recent moves – there’s been a higher quality to recent Small Cap performance – the Russell 2000 is not being propped up by the quantum stocks like we saw back in October.
All that being said, there are some caveats – On the Fed, only a few more cuts are anticipated by our Rates Strategy team and consensus, net income growth is expected to peak in 2Q26 in consensus estimates, and the lower P/E’s of the Russell 2000 vs. the S&P 500 reflect a much lower ROE in Small Cap.
Additionally, as we’ve highlighted before, to get a sustainable Small Cap leadership trade we really need to see economic indicators like jobs growth and ISM manufacturing heating up – historically a very hot economy or recession rebound needs to be anticipated for Small Cap leadership to be sustainable. And that’s just not what we’re seeing right now.
