An Early Take on 2015 and the S&P 500

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

Earlier this week, I was part of a panel discussion on Money with Melissa Francis that aired on the Fox Business Network and addressed the direction of the S&P 500 and where it will end up by year-end. For extra fun, we also were asked where we thought the market would be during the coming 12 months. Driving the conversation was a recent note published by Goldman Sachs (GS) that called for the S&P 500 to rally to 2,050 by year-end — a 2.8% move higher from last night’s close. Goldman Sachs’ chief U.S. strategist, David Kostin, went on to share his view that the S&P 500 could hit 2,150 in the coming 12 months — a 7.8% move higher.

As I shared with the panel, I would love, love, love if the Goldman call about the market turns out to be on the money — pun intended. When I strap on my investor cap, however, I have to question how likely those moves are, particularly the longer-term one.

In other words, what are some of the driving assumptions, and are they valid, as well as achievable?

Let’s break out the ol’ chalkboard and make a list of positives and negatives, which is something l always do when looking at the economy or a new stock position to share with my PowerTrend Profits subscribers.

Three things are helping Goldman’s call for the S&P 500 to rally to 2,050 by year-end. First is the improving U.S. economy, led by surging industrial and manufacturing industries. Commentary from General Electric (GE), Caterpillar (CAT) and others confirm this trend remains on track. Second, gas prices continue to fall, and that should help put some Christmas cheer into consumers as the holiday-shopping season kicks off. Third, the Fed is poised to keep interest rates low well into 2015.

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On the other hand, we are seeing further evidence of a slower euro zone. As we all know, growth in China is slowing. Turning the data around, we have to ask where this big earnings growth acceleration will come from amid a slowdown in the euro zone and China. Keep in mind, those two regions account for more than one-third of global gross domestic product (GDP), compared to the United States at 23 percent. Deflation is becoming the latest investing buzzword as the dollar strengthens. The Ebola virus, ISIS, the Middle East and Russia remain wildcards to watch. Put it all in a cocktail shaker, shake and what we find when we pour it out is a number of negatives that counterbalance the positives.

That’s the quick fundamental snapshot, but what tips the “will it, won’t it” scale for me is earnings expectations heading into 2015. Per data from FactSet, consensus expectations for the S&P 500 call for earnings to grow 10 percent in 2015 over 2014. That’s quite a bit faster than the 7-8% earnings growth the S&P 500 is expected to deliver this year over last year. Keep in mind, if we adjust for the volume of shares being bought back — the “S” in earnings per share (EPS), as it were — that 7-8% of expected growth would probably look more like 5% or so.

Try as I might, I can’t find a compelling answer to the core question — what will happen that will cause earnings growth to accelerate even more next year?

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S&P Projections Chart Source: FactSet

If Goldman is correct and the S&P 500 climbs to 2,150, I would be happy on one hand, but quite nervous on the other. Such a ride like that is likely to result in a repeat of what we just went through during the last few weeks — rising concerns and volatility.

That’s why, as we move forward, I’ll be looking for not only growth companies, but also a mix of value and defensive plays that will help my PowerTrend Profits subscribers sleep at night.

One last thing — in a bid to give you more time to use my columns to your advantage, starting next week we will be publishing them on Wednesdays. Be sure to look for it.

In case you missed it, I encourage you to read my e-letter column from last week about the Fed’s reaction to earnings season and worldwide market events. I also invite you to comment in the space provided below.

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