Jeremy Siegel’s 2016 Forecast For Stocks
December 7, 2015
by Robert Huebscher
Since its inception in January 2012, the long book of the Voss Value Fund, Voss Capital's flagship offering, has substantially outperformed the market. The long/short equity fund has turned every $1 invested into an estimated $13.37. Over the same time frame, every $1 invested in the S&P 500 has become $3.66. Q1 2021 hedge fund Read More
Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and a senior investment strategy advisor to Wisdom Tree Funds. His book, Stocks for the Long Run, now in its fifth edition, is widely recognized as one of the best books on investing. It is available via the link below. He is a regular columnist for Kiplinger’s, a “Market Master” on CNBC and regularly appears on Bloomberg, NPR, CNN and other national and international networks
I spoke with Jeremy on Monday, November 30th.
In our interview on November 24 of last year, you said the fair value of the S&P 500 was approximately 2,300. On that day the S&P closed at 2,064 and on Friday it closed at 2,090, which is a 1.2% gain. Now that’s short of your forecast, but in fairness, the consensus at that time was considerably more bearish than you were forecasting. What happened that you did not expect?
Outside of a recessionary period, I have never seen a shortfall of earnings relative to estimates as sharp as we have had this year. We had a total collapse in earnings.
At this time last year, the estimates for S&P 500 operating earnings were between $120 and $125. Now, those earnings are coming in at approximately $106 to $107. This is an unprecedented decline. It happened because of the collapse in oil prices and the strength of the dollar. That has taken $15 off of S&P earnings.
No one thought oil would go down so far. When people ask, “Well, isn’t lower oil good for the U.S?” The answer is, “Yes. Lower oil is good for the U.S. In fact, even a higher dollar, everything equal, is good for the U.S. It increases purchasing power. It lowers the price of imports and it helps the consumer.”
But the problem is the S&P is not just a U.S. Index. With 40% to 45% of its profits earned abroad, a heavy energy sector and an industrial sector that supplies to the energy sector, anything that pounds energy is going to pound the S&P. That’s why the return on stocks fell so sharply from what I had predicted.
Can we expect a bounce back next year? What is the fair value for the S&P 500?
S&P 500 operating earnings estimates are about $125. That was way too bullish a year ago. I think that’s still probably too bullish. But I don’t think $120 is necessarily off the table because outside of the energy sector we did have a good 7% to 8% growth in earnings. All we need is for oil to stabilize at the $40 to $50 level and the dollar to stabilize at $1.05 to $1.10 for the euro for us to get a nice snap back in the earnings.
If we get an earnings recovery, then we will have a one-year delay of my forecast last year. Reaching 2,300 for S&P 500 is definitely a possibility by the end of 2016.
The drop off in earnings was to some degree offset by an increase in PE multiples.
Yes, P-E ratios have risen because of the anticipation of a bounce back in earnings. We have PEs that are pretty elevated. Based just on this year’s operating earnings, we are at about 19. As I did last year, I’m going to say that in the low-interest-rate environment we are in, a multiple of 18 to 20 could be considered a fair market value. If you apply that multiple to an earnings bounce back you get 2,300 for 2016 on the S&P.
I want to be clear that you are using operating earnings and not reported earnings.
That is correct. You and I have discussed which is a better measure, operating or reported. S&P operating earnings are extremely conservative and they are much lower than the IBES estimates of earnings. Actually, S&P operating earnings are about the most conservative operating earnings out there. At 2015 estimates of $106, that gives us a PE multiple of about a 19.5.
You’ve got a lot of write-downs, especially in the energy sector in this year’s earnings. But when I say 18 to 20 times earnings, I’m talking about a conservative measure of the operating earnings such as Standard and Poor’s uses.
The question that all investors are asking is whether the Fed is going to increase interest rates when it meets in December. You said last year that you believe we are in a permanently lower interest-rate environment. Has your view changed at all on rates?
No it hasn’t.
I said last year that if oil prices continue to go down, the Fed hike would be delayed until possibly the end of this year. It is a virtual certainty that we will have our first hike in December. But we will still have permanently lower rates. Last year, I said we are going to see an average 10-year TIPS rates at 1.5% in the next several years and average Fed funds rate of 2%. That was way below estimates last year, but now is becoming a much more accepted forecast.
The minutes of the last FOMC meeting started out by indicating that The Fed staff thinks that the “new-neutral” Fed funds rate is going to be 2%. That is a huge change from what they had been anticipating. They had been saying that the long-term Fed funds rate is going to be 3.5%. So the Fed staff believes that we are in a permanently low interest-rate environment. Now the Fed staff is distinct from the FOMC members who make decisions, but the staff’s research is very influential.