“Our ‘Roaring 2020s’ scenario is looking not only possible, but also probable.”
Earlier this month, Barron’s highlighted the 2024 S&P 500
targets for six investment strategists including yours truly. Our target is the highest at 5,400, based on projected S&P 500 earnings per share of $250 next year. Morgan Stanley’s Mike Wilson has the lowest numbers at 4,500 for the index’s price target and $229 for earnings per share. In last year’s survey by Barron’s, we had 4,800 as our S&P 500 target for 2023 with earnings at $225. The low comparable readings were 3,930 and $199.
Along the way, we trimmed our 2023 year-end target to a more reasonable 4,600. Then, on June 5, we wrote: “Is all the AI euphoria leading the stock market into another ‘MAMU’ — ‘Mother of All Meltups’? If so, our 4600 target for the S&P 500 by year-end might prove conservative, not controversial.”
On July 19, we wrote: “The S&P 500 is now almost at 4600. It closed at 4556.27 on Tuesday. Rather than raise our year-end target, we are raising our expectations for what the bull market could deliver through the end of 2024 and beyond. We think that 5400 is achievable by the end of next year. If that happens, then 5800 would be our target for the end of 2025. In other words, we think that the bull market has staying power.”
Last week, we raised our 2025 target for the S&P 500 price index to 6,000, as our “Roaring 2020s” scenario is looking not only possible, but also probable.
Now let’s review our talking points on behalf of the bullish team in the Great Debate. Here’s an even dozen:
1. Interest rates are back to normal: Perhaps the U.S. Federal Reserve hasn’t been tightening monetary policy so much as normalizing it. Interest rates are back to the Old Normal. They are back to where they were before the New Abnormal period between the Great Financial Crisis and the Great Virus Crisis, during which the Fed pegged interest rates near zero.
The normalization theory implies that the Fed might not lower interest rates next year as much as widely expected. That’s because the U.S. economy wouldn’t require as much easing to reverse the tightening. If the economy remains resilient but inflation continues to fall closer to the Fed’s 2% target next year — both of which we’re expecting — then the Fed might lower the federal funds rate twice next year, by 25 basis points each time, instead of four times or more as widely anticipated.
2. Consumers have purchasing power: Many consumers may soon run out of their excess saving, as the economy’s naysayers are saying. Some consumers could be weighed down by too much consumer debt, especially student loans. Nevertheless, most of them are likely to continue to consume as long as their job security remains high, which it will be as long as there are plenty of job openings and as long as the unemployed and new entrants to the labor force fill those openings. That describes the current state of the labor market.
Indeed, during November, 40% of U.S. small-business owners reported that they have job openings. During October, there were 8.7 million job openings overall in the labor market versus 6.5 million unemployed that month. The labor force has increased 3.3 million during the first 11 months of this year. The household measure of employment is up 2.7 million over the same period.
Pandemic-related excess saving certainly helped to boost consumer spending over the previous three years when unemployment was very high and real wages stagnated. But unemployment is low now (i.e., below 4.0% since February 2022), and real average hourly earnings is rising once again along its 1.4% annualized trendline that started in 1993.
Both nominal and real wages and salaries in personal income and unearned personal income (including interest income, dividends, rents, and proprietors’ income) rose to record highs during October. They probably did so again in November.
3. Households are wealthy and liquid: The net worth of American households totaled a staggering record-high $151 trillion at the end of the third quarter. Their portfolios are diversified in various asset holdings that all are at- or near record highs. There are certainly lots of liquid assets that might be sold to buy stocks and bonds when the Fed decides to lower short-term interest rates. A record $5.9 trillion is in money market mutual funds (MMMF) with a record $2.3 trillion in retail MMMFs. Commercial bank deposits in M2 totaled $17.3 trillion during the Dec. 12 week.
There are 86 million households that own their own homes, and 40% of them have no mortgages. Many of these homeowners likely are baby boomers. They have mostly followed the advice of Star Trek’s Spock to “Live long and prosper.” Collectively, the generation held $73.1 trillion of net worth at the end of the third quarter. Boomers are likely to be among the main beneficiaries of record unearned income streams.
4. Demand for labor is strong: Some of the baby boomers are providing some financial support to their young-adult children. The boomers are also eating at restaurants and traveling more often. They are visiting their health care providers more frequently to make sure that they live long enough to spend some of their retirement nest egg.
Not surprisingly, November’s better-than-expected retail sales was led by food services, which rose to yet another record high. Employment continues to soar in the leisure and hospitality industry as well as in the health care sector.
5. Onshoring boom is boosting capital spending: American and foreign manufacturing companies clearly are onshoring to the U.S. Supply-chain disruptions during the pandemic and growing geopolitical tensions between the U.S. and China have stimulated the onshoring rush. So has a shortage of workers in China.
The onshoring boom and the federal government’s increased spending on public infrastructure are boosting new orders for construction machinery, which is up 30.5% over the past 24 months through October. Onshoring and infrastructure investment also explain why construction employment rose to yet another record high of 8 million during November despite the recession in single-family housing starts.
Construction spending on manufacturing facilities is soaring because of the increase in onshoring partly owing to federal incentives. In current dollars, it is up a stunning 71.6% and 136.8% on one- and two-year bases.
6. Housing is all set for a recovery: The plunge in U.S. mortgage interest rates since early November undoubtedly will boost new and existing home sales. That should give a boost to housing-related retail sales on appliances, furniture, and furnishings. The rolling recessions in housing and housing-related retailing should turn into rolling recoveries for both.
7. Corporate cash flow is at a record high: The economy’s resilience can also be attributed to the awesome ability of U.S. corporations to generate cash flow. It totaled a record $3.4 trillion (saar) during the third quarter. That’s despite the pressure on companies’ profit margins coming from high labor costs and higher interest rates over the past couple of years. Corporate cash flow is up 4.1% year over year, with tax-reported depreciation up 6.9% and undistributed profits down 3.3%. The latter has been relatively flat since the third quarter of 2009.
8. Inflation is turning out to be transitory: There can be no debate about the transitory nature of goods inflation since the first half of 2020. It was down to zero year-over-year during November. It turned out to be mostly attributable to the shocks and aftershocks of the COVID pandemic, which have been dissipating.
Almost all the inflationary pressures on durable goods and many nondurable goods stemmed from the pandemic-related supply-chain disruptions, which can be seen in the Global Supply Chain Pressure Index compiled by the Federal Reserve Bank of New York. The index jumped from 0.1 in October 2020 to peak at 4.3 in December 2021. It has plunged since then, returning to 0.1 in November of this year. The PPI inflation rate for transportation and warehousing has followed suit.
Now that the goods inflation shock is behind us, the services inflation shock is showing signs of dissipating. Expect it to do just that in 2024.
9. The high-tech revolution is boosting productivity: Companies are allocating more of their capital spending budgets to technology hardware and software to boost their productivity in response to chronic labor shortages. As a result, production of high-tech equipment and spending on software are at all-time highs.
We believe that a major cycle in productivity growth started at the end of 2015, when it bottomed at 0.5% (based on the 20-quarter average) and rose to 1.8% during the third quarter. We expect productivity growth will peak around 4% by the end of the decade.
10. Leading indicators are mostly misleading: What about all those leading indicators that have been signaling an impending recession since last year? We’ve often explained why they are misleading. For example, inverted yield curves in the past have anticipated that the Fed’s tightening would break something in the financial system, causing a credit crunch and a recession, that’s not always the case. There was a mini-banking crisis in March of this year. But it was contained by the Fed so had few systemic ripple effects.
The LEI has misfired its recession signals because its composition is biased toward predicting the goods sector more than the services sector of the economy. There has been a rolling recession in the goods sector, but it has been more than offset by strength in services, nonresidential private and public construction and high-tech capital spending.
11. The rest of the world’s challenges should remain contained: Also booming is industrial production in the defense industry, which is likely to continue rising to new record highs given the geopolitical turmoil around the world. The wars between Russia and Ukraine and between Israel and Gaza should remain contained regionally. China’s economic woes reduce the chances that China will invade Taiwan. Nevertheless, these geopolitical hot spots will boost defense spending among the NATO members.
The bursting of China’s property bubble should continue to weigh on global economic growth and commodity prices. China will remain a major source of global deflationary pressures. Europe is in a shallow recession and should recover next year as the European Central Bank lowers interest rates.
“Inflation can subside without a recession.”
12. The Roaring 2020s will broaden the bull market: Fed chair Jerome Powell and his colleagues have pivoted toward the soft-landing scenario, which is also known as “immaculate disinflation.” In their Summary of Economic Projections (SEP), they projected three 25-basis-points cuts in the federal funds rate in 2024, up from September’s two rate cuts. They are starting to recognize that inflation can subside without a recession. We think this is happening because China is having a recession and effectively exporting goods deflation to the U.S. In addition, technology-driven productivity growth is making a comeback, in our opinion.
The current bull market received a big boost when AI-related stocks took off in late 2022. OpenAI launched ChatGPT on Nov. 30, 2022. We believe that date is when the stock market first started to discount our Roaring 2020s scenario. At first, the bull market was narrowly based, but it since has broadened to include more sectors and industries. We believe that reflects investors’ realization that the beneficiaries of the Roaring 2020s theme aren’t just the companies that make technology but also those which use it to boost their productivity, whatever their industry may be.
Ed Yardeni is president of Yardeni Research Inc., a provider of global investment strategy and asset-allocation analyses and recommendations. This article is excerpted from Yardeni Research’s “Deep Dive” for Dec. 22, 2023. Individual investors can read Yardeni’s research here. Follow him on LinkedInand his blog.