This post was written exclusively for Investing.com
The has just completed its best first quarter run since 1998, up more than 13%, and there may be more gains to come. Recession fears are quickly fading as economic indicators continue to improve. It’s not just the U.S. equity market that is on fire—global markets have also risen sharply.
The possibility of the S&P 500 crossing 3,000 is no longer a distant mirage, but has become a fast-approaching probability. And it may not be long before whispers of the S&P 500 rising to nearly 3,200 start buzzing through the air.
A Return to The Fundamentals
Despite all the worries, stocks always return to the fundamentals of earnings and growth. As of now, earnings growth in 2019 looks pretty healthy, and the outlook for 2020 looks even better. According to data from S&P Indices, earnings in 2019 are expected to climb by about 9% to over $165 per share and almost 13% to over $186 per share in 2020. It leaves the S&P 500 trading at approximately 15.5 times 2020 earnings estimates, which is pretty low for an earnings multiple based on the historical average.
Since 1988 the S&P 500 has traded on average at roughly 17 to 18 times one year forward earnings. Should the S&P 500 revert to that average throughout 2019, it could result in the index rising to around 3,260. Of course, that is only if those earnings estimates do not fall, which is precisely what they have done: from the beginning of 2019 earnings estimates for next year have dropped about 3.5% from around $193. Additionally, earnings estimates for 2019 have dropped even more, about 7% from their peak in August of roughly $177.
Should that trend continue, then the market may have