We haven’t checked in with the prolific Dr. Ed Yardeni for a while.

But the timing is right because the President of Yardeni Research is making a bold call the S&P 500 will reach 5,000 by the end of next year, a gain of nearly 13 per cent from current levels.

But maybe it’s not that bold a forecast, seeing that Yardeni has been bullish and correct about the direction of stocks for many years now.

Here are some of the factors, as Dr. Ed sees them, that will propel the broad index to that round number over the next 17 months.


by Dr. Ed Yardeni, President, Yardeni Research

While the Running of the Bulls was cancelled in Pamplona this summer, the bulls are still running on Wall Street. The S&P 500 rose to yet another record high on Friday.

It closed at 4436.52, up 18.1% year-to-date and 98.3% from last year’s March 23 low.

A week ago, we did the math and came up with a year-end 2022 target of 5000 for the S&P 500.

Let’s take stock of the stock market’s latest performance:

(1) Blue Angels. We monitor the relationship between price/earnings (PE) x earnings (E) and the S&P 500 with our Blue Angels framework.

It shows that last year’s rebound in stock prices was led by the P/E until E bottomed during the week of May 15, 2020. E is up 50.8% since then, while the S&P 500 is up 54.9% over the same period.

In other words, the remarkable rebound in forward earnings has been leading the bull market’s charge since last spring and continues to do so.

On a year-over-year basis, the S&P 500 is up 32.3%, with E up 42.2% and the P/E down 5.2%.

(2) Quarterly and annual earnings. Meanwhile, this year’s quarterly S&P 500 earnings continue to stampede over the consensus forecasts of industry analysts.

The Q1 results were 23.6% better than they expected at the start of that quarter’s earnings reporting season.

The latest blend of actual and estimated results for Q2 during the July 29 week is 13.5% above the consensus estimate before the start of the latest season.

The latest year-over-year (y/y) earnings growth rate for Q2 is 82.1%.

As a result, industry analysts have been raising their Q3 (now up 26.9% y/y) and Q4 (19.8%) earnings-per-share estimates for this year as well as for each of 2022’s quarters.

They are expecting revenues to grow 14.0% this year, 6.6% next year, and 5.1% in 2023.

As a result, they are projecting that the profit margin will increase from 12.9% this year to 13.2% in 2022 and 13.8% in 2023

US Economy: Not as Hot? The S&P 500 stock price index on a y/y basis is highly correlated with the manufacturing PMI.

That’s because the M-PMI is highly correlated with the y/y growth rate in S&P 500 revenues.

The M-PMI peaked at a cyclical high of 64.7 during March. It was back down to 59.5 during July, in line with previous cyclical peaks in this index.

The M-PMI is a diffusion index that reflects the m/m comparisons of business conditions by purchasing managers.

Its recent weakness may be reflecting a cooling in economic activity, though doubt that.

US Labor Market: Getting Hotter. Friday’s employment report confirmed that the labor market—which has been one of the few laggards in the recovery from last year’s lockdown recession—is getting hotter.

Payroll employment jumped 943,000 during July, and June and May preliminary numbers were revised higher by a total of 119,000. The unemployment rate fell to 5.4% during July from 5.9% the month before.

Job openings remain plentiful for those who remain jobless.

US Inflation: Warming or Cooling? The 10-year US Treasury bond yield rose last week from a recent low of 1.19% on Tuesday and Wednesday to 1.31% on Friday.

More Fed officials are distancing themselves from Fed Chair Jerome Powell’s no-rush stance on tapering the Fed’s bond purchases.

Friday’s employment report certainly suggests that enough “further substantial progress” has been made to start tapering sooner rather than later.

Increasing the heat on the Fed to taper are plenty of inflation indicators, which have yet to confirm the “transitory” nature of the post-pandemic inflation story that Powell has been telling.

Consider the following:

Commodity prices. Both the CRB all commodities index and the CRB raw industrial spot price index remain on their near-vertical trajectories of the past year or so.

Wages. Notwithstanding the many stories about widespread labor shortages, most of the upward pressure on wages so far has been occurring in only two major industries, namely leisure & hospitality and transportation & warehousing.

This can best be seen in the annualized three-month percent changes in average hourly earnings through July.

The total index rose 4.9%, which isn’t particularly alarming, especially if productivity is making a comeback too.

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