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Strategies & Market Trends : ajtj's Post-Lobotomy Market Charts and Thoughts
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From: ajtj999/22/2025 10:03:31 PM
   of 97207
 
GS-Not bearish, but pump the brakes a bit in the near term.

The S&P 500 forward P/E multiple has risen from 21.5x at the start of the year to 22.6x today. That valuation expansion has accounted for 37% (5 pp) of the S&P 500 14% YTD total return, compared with 55% from EPS growth and 8% from dividends. Lifting multiples higher, real 10-year US Treasury yields have declined from 2.2% at the start of the year to 1.7% today, while the risk premium has modestly increased.

Equity valuations are elevated relative to history but appear close to fair value based on the underlying macroeconomic and corporate fundamental backdrop. An accommodative Fed and an economy that accelerates into 2026 should allow the market to maintain its current multiple, leaving earnings growth to drive continued US equity gains. We forecast EPS growth of +7% in 2025 and +7% in 2026.

We roll forward our 3-month S&P 500 return forecast to +2%, our 6-month return forecast to +5%, and our 12-month return forecast to +8%. From the current S&P 500 price, these returns suggest levels of roughly 6800, 7000, and 7200.

During the last 40 years, there have been eight episodes where the Fed cut after being on hold for 6 or more months. In half of those episodes the economy subsequently entered recession. In the other four cutting episodes, during which the economy continued to grow, the S&P 500 generated a median six-month return of +8% and a median 12-month return of +15%.
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