Forecasting the Route: When and How the S&P 500 Might Touch 10,000
The allure of technology’s potential to redefine various facets of the economy has significantly fueled the soaring figures of the S&P 500 this year. Experts believe that technology will play a pivotal role in advancing the index by an additional 5,000 points, thus making equities a more appealing investment over more secure assets, according to insights from DataTrek Research.
Key Points;
- S&P 500 up by 12.2% in 2023, driven by Tech Magnificent Seven: Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla.
- Tech could propel S&P 500 to 10,000 by 2033, with a 9.2% annual compounded return, per DataTrek Research.
- 10-year Treasury yield at 4.7% challenges stocks, though long-term stock durability is expected.
The dynamic influence of the Tech Magnificent Seven – Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL), the parent company of Google, Meta Platforms (META), parent to Facebook, Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) – has been the primary catalyst for the stock market’s impressive 12.2% escalation in 2023, illustrating a strong reason why should invest in these tech giants.
Enthusiasts are convinced that the realm of artificial intelligence (AI) is merely grazing the surface of its capability to enhance productivity and profitability. As a result, the earnings projections for major tech entities have been on an upward trajectory, reflecting the substantial rewards harvested from their innovative ventures.
Market Analysis: Ups and Downs, What Lies Ahead
Interestingly, the market seems to have already factored in a favorable scenario for the wider economy, a stance that diverged from most forecasts at the beginning of the year. This outlook comprises sustained growth, moderated inflation, and adept handling by the Federal Reserve. However, to drive stock values further up the ladder, and entice investors to continue their equity purchases amidst the stiff competition from high bond yields, additional factors need to come into play.
With the 10-year Treasury notes yielding at 4.7%, bonds present a compelling argument for investors. The high-interest rates might sway investors towards bonds or holding cash, even with the knowledge of the probable superior performance of stocks in the long haul.
Mark Haefele, UBS’s chief investment officer of Global Wealth Management, recently shared a common query from clients concerning the rationale behind investing in the prevailing interest rate scenario. He emphasized that while the short-term yields from stocks and bonds might be unpredictable, their long-term durability is anticipated to be robust, dismissing cash as a lucrative long-term investment avenue.
Innovation as a Growth Catalyst
In the context of virtually risk-free Treasuries boasting elevated yields, Nicholas Colas from DataTrek Research articulates that the S&P 500 needs to more than double its value over the forthcoming decade, surpassing the 10,000 mark, to render equities a worthy risk for investors.
Colas calculates the minimal annual compounded return investors should anticipate over the next decade at 9.2%, by adding the 10-year Treasury’s 4.7% yield to the 4.5% equity risk premium for U.S. large-cap stocks, as assessed by Aswath Damodaran of New York University. If this prediction holds, the S&P 500 is set to hit 10,000 by 2033.
This projection, however, sets a lofty standard. The earnings of S&P 500 firms have shown an average annual compounded growth rate of 6.3% over any 10-year span from 1998 to present, exhibiting considerable fluctuations annually. Given that earnings, the chief propellant of stock prices, are nearing peak levels, an expansion in valuations appears necessary to steer the index to the 10,000 milestone. This is where the infusion of innovation becomes crucial.
Colas emphasizes the imperative need for “productivity-enhancing technology like generative AI” to expedite U.S. corporate profits. The thrust towards 10,000 is likely to be tech-driven.
In light of the inability to solely bank on earnings growth to catapult U.S. large caps beyond the required rate of return over risk-free Treasuries, a valuation expansion is deemed necessary to meet this objective. Colas envisages this transition to hinge on a few highly disruptive and lucrative companies scaling their operations, thereby garnering substantial valuations.
Economic Resilience and Technological Enthusiasm
The significant contributions of the Magnificent Seven in the current year, and Big Tech over the preceding decade, underscore the fact that a handful of dominant names can fuel long-term market gains, although a broader base is more beneficial.
Thomas Mathews, a senior markets economist at Capital Economics, echoes a similar sentiment regarding the stock market’s dependency on technology to register notable advancements.
Mathews suggests that the engine for substantial market gains might shift from continued economic resilience to growing enthusiasm in groundbreaking technologies like AI or superconductors, which have the potential to significantly uplift equity valuations.
Conclusion
The trajectory towards the S&P 500 hitting the 10,000 mark hinges on multiple variables, with technological innovation at the forefront. The intersection of technological advancements and economic factors will likely dictate the pace and magnitude of market gains, as investors navigate the balance between risk and reward in a dynamic financial landscape.
