The S&P 500 is on track for its most significant May performance since 2009. With 24 record highs this year and corporate profits expected to continue their upward trajectory, the S&P 500 appears poised to lead a global market rally that could extend well into the decade, according to a prominent Wall Street analyst.
Boasting an impressive 11.3% year-to-date gain, the S&P 500 has defied the typical ‘sell in May’ adage, which suggests springtime market weakness, to achieve its strongest May gain since 2009. The index closed at 5,308 points on Monday, positioning it nearly 10% above the average year-end forecast from Wall Street analysts, according to Charlie Bilello of Creative Planning.
Drivers of the Market Surge
Several factors have contributed to this year’s robust performance. Stronger-than-expected corporate earnings, a resilient economy that has weathered recession forecasts, and an unprecedented period of inverted Treasury bond yields have been pivotal. Additionally, market optimism surrounding a potential autumn Federal Reserve interest rate cut has provided further momentum, despite earlier expectations for more substantial central bank support.
The S&P 500 is likely to set another record as it benefits from the longest gap between Federal Reserve rate hikes, the last of which occurred in July 2023, raising the benchmark lending rate to a 22-year high of 5.25% to 5.5%.
Analysts Adjust Forecasts
Wall Street analysts are adjusting their expectations in response to the S&P 500’s strong performance. Deutsche Bank and BMO Capital Markets revised their year-end targets to 5,500 points and 5,600 points, respectively. Even Morgan Stanley’s Mike Wilson, one of the market’s more bearish analysts, predicted a near-term peak for U.S. blue-chip shares, albeit reluctantly. Wilson raised his S&P 500 target price to 5,400 points, acknowledging the market’s resilience despite mixed economic growth and inflation data.
Interestingly, the market’s key volatility gauge, the CBOE Group’s VIX index, indicates minimal investor concern. Trading near its lowest levels since the pandemic, the VIX was last marked at 12.45, suggesting expected daily fluctuations of 0.78%, or 41 points, for the S&P 500 over the next month. During the height of pandemic uncertainty, the VIX traded around $66.50.
Long-Term Outlook: The “Roaring 20s”
Ed Yardeni, chief investment strategist at Yardeni Research, envisions a “roaring 20s” scenario, characterized by solid earnings growth, a technology-driven economy, and lower Federal Reserve interest rates, propelling steady gains for both the Dow and the S&P 500 through the decade. Yardeni predicts the Dow could reach 60,000 points by 2030, a 50% increase from current levels, while the S&P 500 could hit 8,000 points.
Yardeni’s projection hinges on a forward price-to-earnings multiple of 20 and forward earnings of $400 per share, up 60% from an estimated $250 per share this year. While these long-term forecasts must navigate numerous risks, the immediate outlook for stocks appears favorable.
Current Economic Indicators
The Atlanta Fed’s GDPNow forecasting tool suggests a current-quarter growth rate of 3.6%, more than double the first quarter’s pace. Inflation pressures are also easing, with core consumer prices slowing to an annual rate of 3.6% last month, and further deceleration expected over the summer. Consumer spending remains robust, supported by a strong labor market, with unemployment staying below 4% for over two years.
A recent Bank of America employment survey revealed nearly half of Americans rate their financial wellness as “good or excellent,” up from around 42% in 2023. Additionally, LSEG data projects collective S&P 500 profits to rise 10.4% this year, with a 14.1% increase anticipated in 2025.
Bullish Market Sentiment
Two closely watched Wall Street surveys published last week underscore the bullish sentiment. S&P Global’s Investment Manager Index showed equity-risk appetite at a two-and-a-half-year high, while Bank of America reported that global fund managers are the most optimistic about stocks since November 2021.
“All this is happening with the Fed still holding higher rates, stretched government-debt levels in the U.S. and abroad, record credit card debt, and ongoing armed conflicts in the Middle East and Ukraine,” noted Louis Navellier of Navellier Calculated Investing. “While it feels like a Goldilocks situation until earnings start disappointing, the momentum looks to continue the trend,” he added.
Key Takeaways
- The S&P 500 is on pace for its best May since 2009, with an 11.3% year-to-date gain.
- Better-than-expected corporate earnings and a resilient economy are driving market performance.
- Wall Street analysts are revising their end-of-year targets upward, anticipating further gains.
- The VIX index suggests minimal investor concern, reflecting market confidence.
- Long-term forecasts predict substantial growth for the Dow and the S&P 500 by 2030.
- Current economic indicators, including GDP growth and easing inflation, support a bullish market outlook.
- Market sentiment remains positive, bolstered by strong employment and consumer spending data.
Conclusion
The S&P 500’s remarkable performance in May signals a bullish market sentiment that could sustain into the decade. With strong corporate earnings, a resilient economy, and favorable long-term forecasts, investors remain optimistic despite potential headwinds. As the market continues to defy expectations, the outlook for both the S&P 500 and the Dow appears promising, with substantial growth anticipated in the years ahead.