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 21st.
In our interview on November 30th of last year, you said that 2,300 was a possibility for the S&P 500 by the end of this year, but that it was contingent on an earnings recovery to approximately $120/share. On Friday the S&P 500 closed at 2,182 which is about 5% below your forecast, but S&P operating earnings are approximately $102.80/share, considerably below the target you set. Given the lack of an earnings rebound, your forecast was accurate. What is the fair value for the S&P 500 now and what is your forecast for the coming year?
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Obviously with the election – which we’ll talk about – there is more uncertainty than usual. Actually the $102.80/share is for the 12 quarters ending in September. I just pulled S&P’s current estimate for the full year, and it looks like it will be $109/share, still below my year-ago estimate.
S&P’s forecast for next year is, as it was last year, overly -optimistic. When S&P looks out more than two or three quarters they put on their super-rose-colored glasses. S&P is looking for $130 to $131/share for 2017 operating earnings. At these levels we are only 16- or 17-times earnings. Wow! I wish the market P-E would be that low, even considering that we are in a low-interest-rate environment.
I would hope that we could go to $120/share next year, given the market is priced at a very reasonable 18-19 times earnings. There are a lot of wildcards. Right now the market is selling at 20-times this year’s estimate of operating earnings. That is a high figure from a historical standpoint, but in a low-interest-rate world it should not be considered at all unreasonable.
Let’s talk about your forecast for the economy given the new administration. Obviously we don’t know what policies President-elect Trump will pursue, but let’s start with the following scenario: a significant infrastructure package, a reduction in corporate regulations, a decrease in the corporate tax rate, and at least for the first couple of years no imposition of significant trade barriers. How does that align with your policy expectations? Given that scenario, what would be the impact on the economy and the markets?
That would be a very positive scenario. Before the election, I used to get the big question, “How would a Trump upset affect the stock market?” I said in the short run, it’s bad because the market hates uncertainty and there is certainly more uncertainty with Trump. In the long run, a Trump victory is good because all the Republicans policies, including Trump’s, are capital-positive.
Little did I know the short run would be only six hours long! The very next day we had a huge rally in equities.
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