A Broad Analysis of the Current Stock Market
The S&P 500 opened above 3,900 today but was down slightly in intraday trading. Investors have been bullish on equities since the distribution of COVID-19 vaccines has started to ramp up, driving the S&P 500 up around 4 percent year-to-date. With more individuals being vaccinated, the country can look ahead to times when the economy could reopen and a sense of normalcy could return. The $1.9 trillion stimulus package that is likely to pass in the coming weeks could accelerate this event.
Furthermore, large corporations have loads of cash sitting on their balance sheets that can be used for investments or share buybacks. It almost makes sense that the index is at all-time highs less than 1 year since the country issued lockdown orders.
Currently, the S&P 500 would need to gain a little more than 2 percent to hit the 4,000 mark. Although, investors looking to get in right now should realize that valuations aren't cheap, with the equity risk premium on the S&P 500, the earnings yield on the average stock against the 10-year treasury, is hovering around 3.3 percent. Equity risk premiums have hovered around 3.5 percent in the past. The lower the equity risk premium falls, the less desirable stocks become.
So what could lift the S&P 500 past 4,000? There are a couple of catalysts that could push the index higher.
Rising Earnings Expectations
Analysts have been revisiting their earnings estimates lately, raising them for the most part. However, forecasts are still dim. According to DataTrek, earnings per share on the S&P 500 is around $42 for the fourth quarter. These estimates rising could provide investors with enough optimism to push the index higher.
The Economy Reopening
Millions of consumers have spent more time at home in the past year, barring many of their typical spending habits and increasing savings. The massive wave of spending once the economy reopens, combined with almost $2 trillion in additional stimulus, could send markets higher.
There is a significant downside to the markets that investors should be aware of. For example, if vaccines prove ineffective against COVID-19 mutations, reopenings would likely be delayed. In addition, the rollout of vaccines has been fairly slow and continued pressures from lack of demand and rough logistics could pose a short-term threat to markets. Lastly, an increase in inflation or bond yields would likely deter some investors away from equities.
It has been a historic year for markets and there is a lot to look forward to once we return to whatever "normal" is after this pandemic.