The S&P 500 Broke 5000. Where the Stock Market Goes Next.

It’s little wonder, then, that many strategists see conditions ripe for a pause. Year-end S&P 500 targets of 5,100, which seemed upbeat even at the end of November’s big market surge, now represent gains of just 2%.

Last month, RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina bumped her year-end target—based on various factors including earnings growth and valuation—up from 5000 to 5150. She noted, however, that despite the increase, that new number represented just an 8% gain for the index, unlike the double-digit rise that 5,000 implied in mid-November. “[Our] enthusiasm has actually come down a bit,” she explains.

Likewise, Piper Sandler Chief Market Technician Craig Johnson on Friday reiterated his year-end target of 5,050 in a note titled “Ease Off the Accelerator,” writing that the “technical evidence suggests that the market is due for a modest correction despite the S&P 500 targeting 5,000.”

Even outside of fundamental and technical factors, there are external worries to contend with, given the ongoing conflict in the Middle East and Ukraine. According to data released this week from wealth management group Natixis, roughly half of investment professionals polled think that recession is inevitable in 2024, with both war and terrorism ranking among the top threats as well.

But are those just more bricks for the wall of worry stocks climb? While war and violence are grim, it’s human nature to focus on the negative. Few investors may know when the S&P 500 crossed 3000 or the
Dow Jones Industrial Average
surpassed 25,000 off the top of their heads (2019 and 2018, respectively), but everyone can reel off the dates of the Black Monday, the dot-com bust, and the global financial crisis crashes quite easily.

“It strikes me that most of the market’s canon events are either downright disturbing or at least create the impression that stock prices are manipulated by unpredictable, outside forces,” writes DataTrek’s Nicholas Colas. “Even if you put that idea aside, there seems little doubt that incremental complexity is the hallmark of the U.S. equity market’s story arc.”

The problem is that that is only half the story. Complexity doesn’t have to be bad, and as Colas notes. It’s responsible for the long-term success of the S&P 500. Major U.S. companies are supported by the interplay of various catalysts, like the dollar’s status as a reserve currency and America’s history of nurturing intellectual capital, rather than one single factor. And there’s no reason that should change.

“The bottom line here is that the difficult stuff gets our attention, but the offsetting positives are more important,” he concludes.

On the technical side, a simple chart of the S&P 500 shows that historical patterns support the idea of more gains.

Although the index sometimes needs a few tries to hold on to and surpass big round numbers, momentum almost always wins out. Looking at breakthroughs from 100 to 5,000 shows that “performance for the S&P 500 has been positive after reaching a major milestone,” writes LPL Financial Chief Technical Strategist Adam Turnquist. “Of the last nine, the index posted a 12-month average return of 10.4% after clearing each milestone, with 78% of occurrences producing positive results.”

Fundamentals, too, point to the potential for further gains. While RBC still has a 5,150 year-end target on the index, Calvasina previously explained that one valuation model for the index—which accounts for multiple inputs including inflation, 10-year Treasury yields, and real gross domestic product growth—suggests that it deserves to trade around 23.55 times on a trailing basis by the end of 2024. That would put the S&P 500 above 5,500 based on her firm’s full-year earnings per share forecast of $233. The current consensus calls for earnings per share above $242.

It’s also worth noting that in January 2023, the S&P 500 jumped 6.2%, but the average target—around 4,500—for the index barely budged, according to data from FactSet. Yet last year’s rally ultimately pushed that number above 5,000 by year’s end.

We’re not going to limit ourselves to any one outcome. It wouldn’t be too surprising if the S&P 500 were to suffer a correction soon, even if it finishes the year above most strategist’s targets.

Ultimately, both can be true.

Write to Teresa Rivas at [email protected]