Last week JPMorgan released their third quarter Guide to the Markets and on slide 8 they laid out consensus earnings per share estimates and attribution of that growth.
Consensus analyst estimates put earnings at $275/share in 2025 and around $245/share in 2024. Both of those at the average price to earnings over the last ten years of 23.36 puts the price of the S&P 500 on those dates at $6,424 in 2025 and $5,723.2 in 2024.
At our current $4,400 price on the S&P 500, $6,400 in 2025 implies about a 20% annual return until 2025, which on historical terms would be far above average. Yet the analysts inside of JPMorgan, and analysts broadly on Wall Street, still project a modest 4-5% on the stock market over the next couple of years.
I think Michael Antonelli had an interesting take on this phenomenon, “If you work in this industry long enough you’ll find out that things are bad both ways… Why? Because pessimism sells.”
In that article they list out several examples of bad both ways events.
“Oil prices: When they’re rising, it’s bad because it hurts consumer spending and it drives inflation higher. When they’re falling, it’s bad because they must be a sign of weakening demand, which means we could soon learn the economy went into recession.”
“Walmart sales: When Walmart sales disappoint, it’s a bad sign since they are an economic bellwether as the world’s largest retailer. When Walmart sales boom, it’s a bad sign for the economy because it must reflect financially stretched consumers trading down from higher priced retail options.”
Does the same “pessimism sells” mentality work here too? Could it be that rising earnings are signifying a once again overheating economy that will result in rising inflation thus reinstating another year like 2022 or does it mean that we are truly entering into the next bull market cycle that will last for the next 5-10 years.
Watch what they do and not what they say.
The portfolio managers at JPMorgan may be taking this the same way that I am by saying that rapid earnings per share growth, as laid out in estimates, imply nice equity returns for the coming years.
But in order to be right in markets everyone else has to also believe you are right.
It becomes increasingly important to understand what people are thinking when the outlook is so uncertain.