Stock Talk - S&P 500 = 7000, 2025 Reality Check

Episode Date: December 6, 2024

Drawing on historical patterns and economic indicators, I outline why I believe the S&P 500's trajectory could continue toward 7000 by late 2025, emphasizing the factors that could drive such growth. I'll discuss the significance of valuation tools, the bond market's role, and how historical precedent during past administrations might shape market behavior. Whether you're a seasoned investor or just getting started, you'll gain insights into market dynamics, strategies for navigating volatility, and perspectives on the long-term potential of this bullish trend. Join me as I share my outlook for 2025 and what it could mean for your portfolio.   #BullMarket #TomLee #SP500 #FinancialPlanning   About Chris Perras, CFA®, CLU®, ChFC®, Chief Investment Officer: As CIO, Chris is the lead investment strategist and director of research at Oak Harvest Financial Group. Chris develops the firm's core market outlook, putting his decades of experience and expertise to work for our clients. He hosts Oak Harvest's podcast, "Stock Talk," available on the website with new episodes each week. He completed his undergraduate studies at Georgia Tech, and went on to obtain an MBA from the Harvard Business School. Driven by a desire to maximize his knowledge and skill set, he acquired financial planning and investment management qualifications, becoming a Chartered Life Underwriter (CLU®), a Chartered Financial Consultant (ChFC®), and a Chartered Financial Analyst (CFA®).   Stock Talk is a weekly vlog/podcast dedicated to discussing the Oak Harvest Financial Group Investment Team's perspective on what's happening in the market. Hosted by Chief Investment Officer Chris Perras, each episode brings you our views on stocks, the market, and the economy — with a little education thrown in for good measure. Listen each week and help stay connected to your money!   Do you need a retirement plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at 877-896-0040 or fill out this form for a free consultation: https://click2retire.com/Connect   Important disclosures: Content of Oak Harvest podcasts expresses the views of the speaker and is for informational purposes only. Oak Harvest believes that any data, articles, or information cited are reliable at the time of creation, but does not warrant any information contained herein to be correct, complete, accurate, or timely. References to third-party analysts should not be seen as an endorsement of their views or recommendations, and you should do your own research before investing. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast constitutes personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Any specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss, and past performance is not indicative of future results.

Okay, investors, first off, I have to thank my mom who passed away several years ago, much too early in her life, and my dad, who's still going strong and playing a few rounds of golf every week as he approaches 92 in Atlanta. And I have to thank God for bringing me into this world 59 years ago today. Yep, today is my 59th birthday. It's starting to finally sound old to me. I'm going to keep this one short, but I hope you pass it on to others and help me get my subscriber base above 1,000 before 2025 begins. Investors, we're in a bull market for equities. We've been in a bull market for equities since 2011, securely and cyclically since October 2022, as well as October 2023 pivot higher

from around 4150 on the S&P 500. In mid to late fourth quarter of last year against many calls for a generational top or calls to play defense below line in the sand 416 by a practitioner of Elliott Wave Theory, I forecast the markets as defined by the S&P 500 could get to an optimistic 50, 5,800 into year end, 2024 and 6,000 into inauguration in January 2025.

Yes, investors, that's a move up of 1,500 to 2,000 points over 15 months or so. Most people looked at me and laughed. And yes, I moved that forecast up to 6,000 year end and 6,200 into the inaugural ball during the midsummer sell-off. So we're pretty much there on time and at those levels. And the question is, now what? Well, let's go back about two months ago and pre-2004 presidential election, we shot a video where I postulated the S&P 500 could get to 7,000 by year-end 2025. It seems that a few Wall Street strategists also heard that call, and since the election,

the likes of Tom Lee and a few others who move their targets there. Now, investors, I don't know if we'll get there or not, but I do know how we could get there if we're going to. First off, frequent listeners know that over the last six years at Oak Harvest, I rarely, if ever, have discussed or said the market was overvalued when it was up. Why? Because valuation is a horrible market timing tool for calling market tops. It does work pretty well at finding bottoms in the markets, as we've discussed several times in other videos.

I've seen many strategists and economists on TV and social media discussing how the markets were overvalued in their work. I need to point out that I can't find any of these people who've been right with their market calls in the last two to three years. So I'm not sure why would anyone listen to them now. Those strategists using valuation as a tool have been uniformly bearish for now, for at least two years. And in the case of Jeremy Grantham and others, 10 to 15 years. If you want to talk valuations, let's start where we should, not with stocks, but with the bond market. Investors, let's take a look at the P of a 10-year treasury bond, which is the bond maturity that most quants use. It's long enough to encompass economic cycles and smooth out earnings,

decade of data. The yield on the 10-year Treasury is currently 4.165% comprising of 1.9.035 real growth and 2.268 10-year inflation expectations. Okay, so flip the 10-year Treasury yield on its year, 1 divided by 0.04-165 gives you 24. So the 10-year Treasury has a P.E of 24. And we know a bond cannot grow its earnings over the next 10 years. If one takes the current SP-500, at about 6,025 and divides it by 24, it equals 250. This means that the fair value for the S&P 500 is about 6,025 at the current yield on 10-year treasuries if you think the S&P 500 earns $250 a share.

If you think the earnings per share number for 2025 is 275 due to lower tax rates, higher productivity, higher real growth, or lower regulation, then you can get the target of 6,600 in 2020, pretty easily so long as the risk-free interest rate stays in this range. But hey, Chris, that's not 7,000 like he postulated. Remember, I haven't forecasted 7,000 for year-end 2025,

but I said it's not out of the question. Right now, all the models I have point to 6,600 as the most likely 2025 top up about 10% from here. So, Chris, how can you get to 7,000? That's an extra 5%. Well, I see two paths to get to that outcome. The first and easiest path to me would be higher growth and lower inflation in 2025, leading to a rally in 10-year interest rates. I'm sure many of you will tell me,

Hey, Chris, that can't happen under Trump 2.0 because I listened to all the economic masterminds on TV saying lower taxes, higher tariffs, and higher deficits will cause higher interest rates in 2025. Well, investors, history would say they're wrong. Here's a chart of the 10-year treasury yields in 2016 and 17 verse 2025. basically Trump 1.0 versus Trump 2.0. Those economic wizards you're listening to on TV fail to tell you that longer-term interest rates fell by 50 basis points in 2017 under Trump 1.0. They didn't rise. Take a look at the overlay. Longer-term interest rates rallied about 60 basis points from their mid-December peak to their mid-summer 2017 low. Similar move now,

we take the 10-year yield from about 4.5% at election times. time to 3.9 to 4%. The fairer value PE for the S&P 500 at 4% 10-year treasury is 25 times earnings. And at 3.9% it's about 25.65 times. So 25 times 275 in earnings is 6,875. And at 3.9% on a 10-year yield, presto, it's 7,051. So that's the first way I can get the markets to levitate higher over 15, percent in 2025. A Trump 1.0 economy repeats in 2025. The second way, the way that no one in their mind can fathom. What's that? That's a return to calm under Donald J. Trump, President, 2.0. Come on, Chris, you've lost your mind. Donald Trump's constant posts on Twitter caused volatility in the markets under Trump 1.0. Nope, I have to remind you. That's what most liberal biased

press wants you to believe. The facts are under Trump 1.0, 2017, the first year of his presidency was the calmest in the US stock market ever in history since data was compiled. Let me remind you that a cash S&P 500 did in 2017 under Trump 1.0. Just take a look at the chart. Yes, investors, the largest drop in the cash market, S&P 500 all year, peak to trough, was about 3 and a quarter percent happening over three weeks. And that minus three and a quarter percent was if you were absolutely perfect selling the intraday high and buying the intraday low. Investors, no one does that.

Absolutely no one. Not Soros, not Druckumiler, not Dahlio, not Julian, not Steve Cohen, not even Nancy Pelosi. If you do, give me a call, I'll hire you or I'll come work for you. In 2017, the biggest peak to trough moves that I found looking back were minus 1.47%,

minus about 3 and a quarter percent, minus 2%, minus 1.8%, minus 3%, minus 1.5%, minus 1.5%, and a half percent, and almost minus 2%. Investors, that's nothing. Those are literally untradable noises. Spot implied volatility is measured by the VIX index usually drops around 12.

Before 2017, there were literally less than 10 trading days I've found that traded below 12. During the summer of 2017, spot VIX index hit an intraday low, 8.84. Investors after tax day in 2017, there were literally only five trading days, the rest of the year that spot volatility closed above 12 and a half, which is historically its lowest closing low. Take a look at the VIX overlay then and now. Investors, I know it sounds far-fetched,

but investors just in late October of this year in front of the election worries, the realized volatility level of the S&P 500 hit 8.67 on October 22nd. And that's when investors were paying up for election insurance. When implied volatility was close to 18 to 20, investors were overpaying by 200 to 225%. Spot implied volatility collapses to 8 to 9, like it did in 2017. A year I said up until two months ago would never be repeated.

The S&P 500 gets to 7,000 in 2025. Full stop. It's the math and the insurance markets. I know I said it would never happen again in my lifetime, but if it's going to happen, 2025 will likely be the year. Why? Tax cuts are their extension.

Higher employee productivity, foolish employment, lower stable inflation, the Federal Reserve cutting interest rates, peace in the Middle East, maybe peace in Russia and Ukraine, China stimulates their local economy instead of worrying about Taiwan. No sellers are less insider selling of stocks due to low tax rates being extended, not into 2026 and beyond. At the same time, 401ks are flush in buying stocks due to high employment. Investors, S&P 500, 7,000 in late 2025. it's doable in the next 12 to 14 months. Simple answer is yes.

Is it easy? No, of course not. Black swans can hit. The unforecastable can play out. Maybe it is different this time. But investors, before you dismiss myself with the likes of Tom Lee or Rich Ross, who have been more right than wrong

over the ongoing bull market in favor of those retired billionaire hedge fund managers or Dumers like Jeremy Grantham, Rywork Kiyosaki, or newsletter writers who keep trying to scare you and have been horribly wrong, ask yourself, have they been right? Have they been right lately? Have they been right consistently?

Or were they one-hit wonders from years ago, if not decades ago, who keep popping up in your social media feed because of a catchy computer algorithm and knows your age, knows your gender, and knows your political beliefs? Investors against nearing a decade-long doomer calls from Jeremy Grantham, Harry Dent, and others, that come on CBC almost monthly to scare viewers or in a bull market for equities in the U.S.

Investors, until proven otherwise, trade or invests similarly to Trump 1.0 for at least thoroughly stages of Trump 2.0. Why? Because it's the same people doing the same things, and therefore the outcomes tend to be very similar. A similar outcome to 2017 for 2025 would be the S&P 500 at 7,000. And investors, that would be one hell of a 60th birthday. for me and for your portfolio a year from now on my 60th birthday in December of 2025. Time will tell on this one. For myself from Eric behind the camera and the whole crew, have a great weekend.