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On Central Banks In Wartime
The economic trajectories that global central bankers had thought their countries were on before the Iran war started have been upended by disrupted supply chains, altered trade relationships, spiking inflation, and impaired growth prospects. When the war and the discombobulation it’s causing will end is anyone’s guess. William describes the decisions facing the Fed and its counterparts in Europe, Japan, England, and China as they attempt to steer their economies in the dark. … Also: Toby discusses the yen’s weakness, which displeases President Trump and complicates the BOJ’s path forward.
Read Full AnalysisROARING 2020s: Wall Street's Analysts Even More Bullish On Earnings Than Us!
The US economy remains resilient, and so do corporate earnings. The US economy has passed several stress tests in recent years. The war in the Middle East is proving to be the latest stress test for the US economy, which seems to be passing it, so far. The macroeconomic data released in recent weeks confirms this resilience. The pre-war growth trajectory was solid enough that we were on the verge of raising our already bullish earnings estimates for 2026 and 2027. The war stopped us from doing that. It seems Wall Street analysts haven't received the memo about the war. Their consensus estimates for S&P 500 revenues and earnings for this year and next year have been rising noticeably in recent weeks. We thought our pre-war estimates were bullish. The analysts are even more bullish. For now, we are sticking with our pre-war earnings forecasts, which support our 7,700 forecast for the S&P 500 by the end of this year. It could be higher if the analysts' estimates hold. Consider the following: (1) RPS. The analysts' consensus estimates for 2026 and 2027 revenues per share (RPS) are very optimistic, with gains of 8.5% and 7.6% projected (chart). The average annual growth rate of RPS since 1993 is 4.3%, though that includes expansions and recessions. (2) EPS. The analysts are similarly bullish about S&P 500 operating earnings per share (EPS). The consensus currently has 2026 EPS at $323.73 versus our estimate of $310. For 2027, the analysts’ current estimate is $377.94 versus our estimate of $350 (chart). They expect EPS to increase by 19.3% this year and 16.7% next year. The average annual growth rate of actual EPS since 1993 is 8.8%, including booms and busts. (3) Profit margin. The analysts' consensus is closer to our outlook on profit margins (chart). They agree with us that the profit margin is heading to new record highs this year and next year. (4) Long-term EPS. We project S&P 500 EPS will rise to $500 in 2030 (chart). We continue to bet on the economy's resilience. So our revenues and earnings forecasts assume no recession this year or over the next five years. (5) Forward EPS. The stock market discounts forward earnings over the next 12 months (i.e., actually 52 weeks in our framework). We assume that the market will discount our forward earnings projections based on the analysts' identical projections each year. So at the end of 2029, we think the analysts collectively will be estimating $500 in EPS for 2030 (chart). (6) Forward P/E. We are also assuming that the S&P 500 will trade in a forward P/E range of 18-22 over the rest of the decade (chart). That's mostly because we don't expect a recession over this period. (7) S&P 500 year-end targets. Multiplying forward EPS for every year by the forward P/E range yields an S&P 500 target range for the end of every year through the end of the Roaring 2020s (chart). We are inclined to target the upper end of each range. So we still expect to see 7,700 by the end of this year and 8,800 by the end of next year. By the end of the decade, the upper target is 11,000, though we would be happy with a nice round even 10,000. If we conclude that the analysts' more optimistic outlook is correct for the next couple of years, we might have to raise our S&P 500 price targets. Then again, we could be wrong about there being no recession over the rest of the decade, which would force us to lower our targets. However, we've bet on the economy's resilience since August 2020. So far, so good, and we continue to do so.
Read Full AnalysisOn US Profits, Consumers & Inflation
With the US economy producing record-breaking earnings and margins, Dr Ed and Elias wouldn’t be surprised to see employment pick up despite AI adoption and other factors holding it back. … They also expect consumer spending to remain resiliently robust even though income growth isn’t keeping up, which is depressing the saving rate. But not even a negative saving rate—which may occur—would tank consumer spending in today’s environment, they maintain. The spending of retired Baby Boomers would keep it afloat. … Also: CPI inflation historically runs higher than PCED inflation; lately, the reverse is true. That’s mostly because rent inflation, which is moderating rapidly, carries more weight in the CPI.
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