Even the bulls are getting trampled by the tech-sector-heavy U.S. market. A melt-up could be coming.

By Ed Yardeni

Ed Yardeni: Why Nvidia and stocks now might remind you of Cisco and the 1990s market bubble

By the end of the decade, we see 8,000 on the S&P 500.

The bull market has stampeded through some of the most optimistic price targets on Wall Street - including ours. While we are sticking with our S&P 500 SPX year-end target of 5,400, we're looking forward to the bull run lifting the U.S. benchmark index to 6,000 by year-end 2025 and to 6,500 by year-end 2026.

Meanwhile, many investment strategists are now scrambling to raise their targets for the S&P 500. At the end of 2022, we predicted that the index would increase 20%, from 3,839 to 4,600, by the end of 2023. It got there by the end of July of that year. We stuck to our target even as a correction down to 4,117 unfolded through Oct. 27, 2023. The index rebounded to 4,769 by the end of last year, slightly exceeding our target.

At the end of last year, our year-end target for 2024 was 5,400, which was among the most bullish forecasts out there. The index surpassed our target on June 12. It closed at 5,464 on Friday.

It's likely that this bull market will continue through 2025 and 2026. By the end of the decade, we see 8,000 on the S&P 500. After all, it's the Roaring 2020s, baby! (Our Roaring 2020s thesis reflects our expectation that rising productivity growth, thanks to widespread adoption of new technologies in response to the shortage of skilled labor, will support robust growth in gross domestic product and profits while keeping a lid on inflation.)

Stock-market meltup could be coming

A few strategists recently raised their year-end 2024 targets for the S&P 500 to 6,000, with the hedge that the index, after reaching that level, might take a dive. We agree that the market is showing signs of a meltup that might be setting the stage for a meltdown. But if so, we think the meltdown would more likely be a rapid 10% to 20% correction than an outright bear market - that is, one with a drop greater than 20% from the peak. That's because we aren't expecting a recession.

Furthermore, the so-called Fed Put is back now that consumer-price inflation has fallen closer to the Federal Reserve's 2% year-over-year target by the end of 2024. If the stock market starts to fear that a recession is nearing, the Fed will most likely relieve that anxiety by easing.

If there is a meltup, an earnings-led meltup should be more sustainable than a valuation-led meltup. The meltup of the late 1990s was mostly a valuation-led one for the S&P 500 information technology sector. However, industry analysts joined the irrational-exuberance party back then by raising their earnings estimates, especially for IT companies.

Currently, the valuation multiple of the sector is elevated, but not as much as it was during the late 1990s. This time, earnings expectations are also rising for information technology, but they look to be based on more solid fundamentals than during the dot-com frenzy of the late 1990s.

Value and valuation

Let's look more closely at the outlook for the broad market before turning to a comparison of the 1990s and today.

1. Quarterly and annual analysts' consensus estimates: S&P 500 earnings per share solidly beat expectations during the first quarter of 2024 and boosted estimates for 2024, 2025 and 2026. At the start of the last earnings-reporting season, industry analysts expected a 1.2% year-over-year growth rate. The actual result was an increase of 6.8%.

The analysts now expect the following increases over the rest of this year: second quarter, 9.5%; third quarter, 8.7%; and fourth quarter, 14.3%. Interestingly, their second-quarter consensus estimate hasn't been lowered at all since mid-May. That's unusual, because analysts tend to lower their estimates for the coming quarter's earnings season as it approaches.

Here are the analysts' consensus S&P 500 earnings-per-share estimates and their growth rates for 2024 as of the week of June 20 ($244.77, 10.7%), for 2025 ($279.30, 14.4%) and for 2026 ($315.97, 12.1%). The S&P 500 forward earnings rose to a record $261.37 during the June 20 week.

2. Our annual earnings estimates: Those estimates look quite reasonable to us, since our projections are close to the analysts' outlook. Here are our numbers: $250 for 2024, $270 for 2025 and $300 for 2026. We are projecting $400 by 2029. We haven't changed our estimates for the past couple of years because we haven't had to do so.

We are also estimating that S&P 500 revenues per share will grow 1.3% this year, 3.9% next year and 4.1% in 2026. Our numbers are conservative relative to the analysts' consensus expectations, currently at 4.6%, 5.8% and 5.6% year over year.

In any event, our S&P 500 margin projections are about the same as analysts' margin estimates: 13.2% from us vs. 12.6% from them for 2024, 13.7% from both of us in 2025, and 14.6% from us vs. 14.5% from them in 2026. If the estimates for 2025 and 2026 come to pass, they'd mark new record highs for the S&P 500 margin.

3. Forward earnings projections: Our year-end S&P 500 forecasts are based on our forecast of analysts' consensus forward earnings at the end of each year. In other words, we are answering the following question: What are industry analysts collectively likely to project for the coming year's S&P 500 earnings per share at the end of 2024, 2025 and 2026? Our answers are $270, $300 and $325 - which are the same as our forecasts for earnings for 2025, 2026 and 2027, respectively.

4. Valuation projections and S&P 500 targets: A much tougher question is what forward price-to-earnings ratios we should apply to our S&P 500 forward earnings estimates. Since the bull market started on Oct. 12, 2022, when the forward P/E bottomed at 15.2, we've been targeting the top end of a 16.0-20.0 range. That was quite a bullish projection.

But not bullish enough. Now the forward P/E is 21.0 with forward earnings at $260. Forward earnings is very much on track to hit our $270 forecast by the end of the year. At a 21.0 multiple, the S&P 500 would end the year at 5,670. At a 22.0 multiple, it would be 5,940, very close to our 6000 target for the end of next year.

Technology now and then

There is no obvious answer to the valuation question, so we are dependent on history for some guidance. We don't have to go very far back in time to find a meltup that looks similar to the current one. The obvious analogy is to that of the late 1990s.

1. Valuation multiples, now vs. then: The S&P 500 peaked at a forward P/E of 24.5 during the week of Aug. 13, 1999. If the S&P 500 traded at that same multiple now, it would rise to 6,600 by the end of 2024, with forward earnings at $270 per share. This could happen if the S&P 500's meltup continues to be led by the index's information technology sector, as it was back in the late 1990s. The sector's forward P/E soared from 30 at the start of 1999 to 48.3 during the week of March 14, 2000. Currently, the sector's forward P/E is 30.0.

2. Market capitalization and earnings shares, now vs. then: The information technology sector and the communication services sector combined now account for a stunning 41.6% of the S&P 500's market capitalization. That's as high as they got just before the tech bubble burst in early 2000.

Then again, these two sectors currently account for 33% of the S&P 500's forward earnings, compared with just under 24% when the tech wreck started in 2000, which arguably helps to justify so high a multiple - or at least more so than back then.

The problem is that forward earnings isn't the same as actual earnings. The two sectors' aggregate forward earnings soared more than 200% from early 1995 through late 2000. But then their combined earnings estimate took a dive through late 2003.

The difference between Nvidia now and Cisco in 2000? Valuation.

3. Cisco vs. Nvidia: The meltup during the late 1990s was led by Cisco Systems (CSCO), which made telecommunications equipment to build out the internet. Today, the meltup is led by Nvidia (NVDA), which sells GPU chips used to run artificial-intelligence software. Cisco's stock price soared to a peak of $80 from $10 between early 1998 and early 2000. Nvidia's stock price soared to a recent high of $136 from $11 between late 2022 and mid-June of this year.

But the similarities end there: Look under the hood at valuations supporting the rises and you'll find a big difference. Cisco's forward P/E peaked around 131 on March 27, 2000. Nvidia's forward P/E has been fluctuating widely and wildly between 25 and 80 since early 2020.

Megacap Eight update: The narrowing breadth of the bull market in recent weeks has been attributable to the extraordinary collective outperformance of the high-capitalization stocks known as the Magnificent Seven: Alphabet (GOOGL) (GOOG), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia and Tesla (TSLA).

Our firm has been tracking the relative performance of the "Megacap Eight," which is the Magnificent Seven plus Netflix (NFLX). Collectively, they currently account for a record 31%, 20% and 11%, respectively, of the S&P 500's market capitalization, forward earnings and forward revenues. The collective market capitalization of the Megacap Eight is currently a record $16 trillion. The S&P 500's market cap is currently $45.5 trillion, and it falls to $31.3 trillion without the Megacap Eight.

The forward P/E of the Megacap Eight is 30.8. The S&P 500's forward P/E of 20.9 would be 18.0 without the Megacap Eight. The forward price-to-sales ratio of the Megacap Eight is a record 7.36. The S&P 500's ratio is 2.77, or 2.14 without the Megacap Eight.

Their outperformance obviously also had a significant impact on the S&P 500's valuation multiple, as the group's valuations have increased along with their market capitalizations. More recently, the narrowing breadth of the bull market has been all about the "Magnificent One": Nvidia.

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06-29-24 1212ET

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