My Forecast for the S&P 500: Reaching 5,722 in 2022 Is Possible



Mega-cap
Technology
Stocks
to
Drive
Upward
Moves

The
bulls
were
in
full
command
of
the
stock
market
in
2021,
with
the
S&P
500
advancing
an
impressive
26.9%.
That
was
the
S&P
500’s
third
consecutive
year
of
gains
and
its
best
performance
since
gaining
28.9%
in
2019.

Between
2010
and
now,
the
S&P
500
recorded
its
best
gains
in
2019
and
2021.
Even
2020
was
good,
with
a
gain
of
16.3%.

The
strong
gains
in
the
S&P
500
were
driven
by
the
increase
in
the
allocation
of
technology
stocks,
which
account
for
approximately
30%
of
the
index.

The
S&P
500
was
powered
by
the
incredible
moves
of
the
mega-cap
technology
stocks,
including

Alphabet
Inc

(NASDAQ:
GOOG),
Amazon.com,
Inc.
(NASDAQ:
AMZN),
Apple
Inc
(NASDAQ:
AAPL),
Meta
Platforms
Inc
(NASDAQ:
FB),
Microsoft
Corporation
(NASDAQ:
MSFT),
Netflix
Inc
(NASDAQ:
NFLX),
and
Tesla
Inc
(NASDAQ:
TSLA).


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These
stocks
helped
the
S&P
500
set
71
record
highs
in
2021,
but
the
heavy
technology
exposure
also
makes
the
index
vulnerable
to
volatility.


Chart
courtesy
of StockCharts.com

The
beginning
of
2022
has
seen
technology
stocks
sell-off.
This
isn’t
a
big
deal,
given
their
recent
gains,
and
I
expect
another
up
year
for
the
S&P
500
unless
the
macroeconomic
risks
intensify.

Analysts’
targets
for
the
S&P
500
largely
call
for
a
rise,
but
their
estimates
of
the
gains
are
wide-ranging.
The
predictions
come
with
numerous
assumptions
that
make
things
difficult.

For
instance,
my
estimate
for
the
S&P
500
in
2021
was
initially
4,000
and
I
increased
it
to
4,180.
Even
so,
my
target
fell
12.3%
short
of
where
the
S&P
500
ended
up.

In
2022,
there’s
optimism
about
the
reopening
economy,
despite
the
continued
concerns
about
COVID-19
variants.

In
a
poll
of
analysts
by FactSet,
the
median
earnings-per-share
(EPS)
estimate
for
the
S&P
500
in
2022
sits
at
$222.32.
(Source:
Industry
Analysts
Expect
S&P
500
to
Report
Record-High
EPS
in
2022
,”
FactSet,
December
3,
2021.)

This
represents
the
highest-ever
EPS
estimate
for
the
S&P
500.
If
it
pans
out,
the
EPS
will
jump
above
the
S&P
500’s
pre-pandemic
level.
The
positive
EPS
estimate
discounts
a
strong
recovery.

The
difficulty
is
selecting
the
right
multiple
for
the
S&P
500.
My
assigned
multiple
for
2021
was
too
conservative,
which
resulted
in
my
target
falling
short
of
the
actual
result.


Setting
a
Target
for
the
S&P
500

Take
a
look
at
the
following
20-year
table
showing
the
price/earnings
multiple
for
the
S&P
500.

The
number
has
varied
from
a
low
of
14.9
in
January
2012
to
a
high
of
70.9
in
January
2009,
following
the
Great
Recession
that
was
triggered
by
the
subprime
mortgage
crisis.
(Source:
S&P
500
PE
Ratio
by
Year
,”
Multpl.com,
last
accessed
January
7,
2022.)

The
multiple
for
the
S&P
500
was
36.0
in
January
2021
after
the
COVID-19
pandemic
ravished
the
economy.


Date

S&P
500
Multiple
January
7,
2022
29.5
(estimate)
January
1,
2021
36.0
January
1,
2020
24.9
January
1,
2019
19.6
January
1,
2018
25.0
January
1,
2017
23.6
January
1,
2016
22.2
January
1,
2015
20.0
January
1,
2014
18.2
January
1,
2013
17.0
January
1,
2012
14.9
January
1,
2011
16.3
January
1,
2010
20.7
January
1,
2009
70.9
January
1,
2008
21.5
January
1,
2007
17.4
January
1,
2006
18.1
January
1,
2005
20.0
January
1,
2004
22.7
January
1,
2003
31.4
January
1,
2002
46.2
January
1,
2001
27.6
January
1,
2000
29.0

(Source: Ibid.)

Multiples
tend
to
be
higher
during
times
of
economic
weakness
or
market
shocks
followed
by
moderation
after
the
initial
burst.

The
average
S&P
500
multiple
since
the
technology
market
meltdown
in
2000
is
about
25.7.
The
number
is
much
higher
than
the
historical
average
but
more
in
tune
with
the
recent
valuations.

Since
2020,
there
were
only
seven
years
when
the
S&P
500
multiple
was
higher
than
average.
Since
the
2008
recession,
there
have
been
11
years
with
a
lower-than-average
multiple.

In
the
table
below,
I
assigned
an
expected
value
for
the
S&P
500
based
on
the
EPS
estimate
and
multiple.


Multiple

S&P
500

Change
18 4,002 -13.5%
19 4,224 -8.7%
20 4,446 -3.9%
21 4,669 +1.0%
22 4,891 +5.8%
23 5,113 +10.6%
24 5,336 +15.4%
25 5,558 +20.2%
25.7 5,723 +23.7%



Analyst
Take

Applying
the
average
multiple
in
the
above
table,
I
arrived
at
5,723
for
the
S&P
500,
or
a
23.7%
gain.
While
that’s
possible,
I
doubt
it
will
be
that
high.

Assigning
a
reasonable
multiple
of
20
times,
we
get
a
value
of
4,446,
or
3.9%
below
the
current
level.
This
value
could
be
used
as
a
downside
support
level,
followed
by
the
50-day
and
200-day
moving
averages
at
4,661
and
4,387,
respectively.

If
I
take
the
average
multiple
between
2016
and
prior
to
the
pandemic
in
2020,
the
multiple
is
23.
Applying
this,
I
arrive
at
a
target
of
about
5,113,
representing
a
gain
of
10.6%.

This
estimate
might
look
somewhat
conservative,
considering
the
moves
from
2019
through
2021,
but,
given
the
macroeconomic
risk,
I’ll
start
with
this
target
and
revise
it
based
on
the
ongoing
fundamentals
and
macroeconomic
conditions.

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