Manish Kabra’s reign as Wall Street’s biggest stock bull lasted as long as Savita Subramanian’s.
On March 21 (or thereabouts), Kabra lifted his year-end S&P target to 5,500, overtaking Subramanian’s 5,400 target, instituted around three weeks previous.
Fast forward three weeks from Kabra’s call and Wells Fargo’s Chris Harvey lifted his target by a rather remarkable 20%, to 5,535. That’s the new Street-high. (“Jill, it’s me.” “Good mornin’ Savita!” “We gotta re-run our numbers, Harvey’s at 5,535 now. What I want to do is this. I just want to find — uh — 136 points.”)
5,535 comes from putting a 20.5x multiple on expected 2025 aggregate index-level earnings of $270. Harvey’s call relies pretty heavily on the notion that investors’ time horizon has increased. That’s the crux of the matter, to let Chris tell it.
“In early 2023 we were asked more about our 2024 numbers than our 2023 estimates, which was not typical,” he wrote Monday. “Only after the fact did we realize investors were placing much greater emphasis on 24- month (not 12-month) earnings expectations.”
Investors are still focused more on the out-year, Harvey said. Although the index trades at 21.5x the bank’s current-year EPS estimate (which he dryly noted is a “healthy” multiple considering the cost of capital), it’s “just” 19.3x on an expected $270 of EPS in 2025, which I should note is $20 higher than Harvey’s old estimate. The sunnier EPS forecast reflects a “materially” better US GDP outlook for this year and index “margin benefits” from the S&P’s shifting composition.
The figures above, from Harvey’s update, illustrate the impact of perennial “uber-cap growth” outperformance.
The composition argument’s becoming pretty ubiquitous. For her part, Subramanian argued that comparing today’s S&P to yesteryear’s simply doesn’t make any sense. Harvey on Monday reminded clients that the bank “had already incorporated the style migration by allowing for a higher expected market multiple” in early 2023, but that adjustment was insufficient to forecast last year’s rally because, again, investors’ horizons have shifted out.
Even accounting for “time horizon expansion,” the index looks rich. The 19.3x multiple mentioned above compares to an average 17.4x for 24-month-ahead EPS over the last five years, Harvey noted, before quickly adding that “the acceleration in the expected growth rate, the increased exposure to the higher-multiple growth groups (i.e., Tech + Comms), and the start of a multi-year easing cycle affords a higher multiple, in our view.”
Note to put too fine a point on it, but Harvey’s analysis felt inescapably like a capitulation to a market he believes has evolved. “Investors’ priorities clearly have changed,” as he put it. “Not only has the secular AI story made investors willing to accept high equity multiples, but so too has the monetary cycle, the lack of volatility, the beating of expectations for key stocks, an increasingly growthy SPX and the reward for such action.”
