In order to create a price target for the S&P 500 over the next year, it is very helpful to be able to get the earnings estimates for the S&P500 as a whole for the next 4 quarters. Bob Pisani and the reporters on CNBC seem to always have this information at their fingertips, but it is surprisingly hard to find this basic information online. However, I was able to finally track down some good data on earnings estimates and average PE multiples to use in an exercise in creating price targets for 2018.
Before going any farther, I would like to point out this chart from FactSet that is very interesting. Look how closely the price of the SP500 follows the earnings estimates. In particular, note how the surge in earnings estimates in Jan 2018 (because of the tax cut) was mirrored in a spike in the price. Although the market really started pricing in the tax cuts in Sept 2017 when the probability of a big tax cut starting going up. The probability continued going up when the House of Representatives actually passed a piece of legislation in Nov 2017 and then the tax cuts were signed into law right before Christmas.
Also, note how the price of the S&P bottomed just before earnings in 2009 and how the S&P and earnings went flat ~2013.
S&P 12 month forward earnings vs price
Here are some links to data on earnings estimates:
ThomsonReuters Forward and Trailing Estimates
S&P 500 forward and trailing PE for last 3 months
Ycharts S&P500 earnings estimates for next 8 quarters
WSJ forward and trailing PEs on indices
As of the writing of this post, the current December 2018 earnings estimate for the SP500 is $157.59 according to ThompsonReuters. and this FactSet article has a chart that shows it at $160 over the next 12 months.
To set a price target we need to determine what multiple we expect the market to be trading at end-of-year. According to the FactSet article above, the SP500 is currently trading at 16.9x forward earnings. The 5 yr average forward PE is 16 and the 10 year average is 14.3. This article at Mott Capital states that the S&P 500 has been trading at ~23x TRAILING earnings since 2015, while the average trailing PE has been 21.5 since 1988 with a standard deviation of 6.
S&P 500 Trailing PE since 1988
You should calculate your own estimates of course, but putting some of those multiples on the range of earnings estimates gives us the following table:
PE ratio
est. 14 16 18 21 23
$150 2100 2400 2700 3150 3450
$155 2170 2480 2790 3255 3565
$160 2240 2560 2880 3360 3680
$165 2310 2640 2970 3465 3795
As of Feb 27 2018, the SP500 is at 2744 which is a forward PE of 16x-18x depending on what earnings estimate you use. But if we assume a year end trailing multiple of 21 (about what it is now) that puts the S&P 500 between 3150 and 3465 by the end of the year (a gain of 14.7% and 26.2% respectively). Those price targets are a bit higher than the price targets I have been reading.
The last question is whether the PE multiple is going to shrink, stay the same, or go up over the next year. On one hand we are now in a rising interest rate environment. Rising interest rates means future earnings are worth less so that should push the multiple you are willing to pay down. On the other hand, what if economic growth increases to 3 or 4% per year? If companies start growing faster their future earnings go up and so you should be willing to pay a higher multiple for future earnings.
Also, if companies keep beating earnings estimates like they have been then the earnings estimates for the S&P 500 will need to be revised higher.