Year Ahead Price Targets For S&P 500, Its Sectors And Individual Constituents

by: Richard Shaw


"Street" 12-mo nominal price return target for S&P 500 = 7.73% (index price ~ 1995).

3 most favored sectors are Consumer Discretionary (11.07%) Health Care (9.69%), and Energy (9.31%).

Least favored sector is Utilities (0.35%).

Demonstrate "Street", Thomson/Reuters StarMine, S&P Capital IQ and Value Line have major differences of opinion on attractive and unattractive S&P 500 holdings.

Download file for Street 12-mo target price gains available for all S&P 500 holdings.

We identified the "Street" (Thomson/Reuters First Call) 12-month price change target for the individual holdings of the S&P 500 index, along with index weights and sector designations to see where the street thinks the index, its sectors and its holdings are going.

The S&P 500 Index:

The position weighted Street estimated 12-month price return for the S&P 500 is 7.73%.

When the dividend yield is added, a tracking ETF such as SPY or IVV would be expected to generate a nominal total return of about 9.6%.

The real rate of return over the next 12-months for the S&P 500, or its low expense tracking ETFs, is about 7.5% to 7.8%. That is based on the 2% inflation target of the Fed, and the 1.8% to 2.1% inflation rate implied by the 5-yr to 10-yr regular Treasury bonds versus inflation protected Treasuries. At least that is what the Street thinks.

Thinking positively about analyst estimates, you could say that with perhaps at least 5 to 10 estimates per S&P 500 holding (20+ for the larger market-cap stocks), there must be at least 2,500 to 5,000 separate judgments being expressed in the Street opinion. While individual estimates may be way off, the over and under estimates may cancel out to a pretty good overall estimate.

Thinking negatively about analyst estimates, you could say that they have a bias toward positive estimates because of business development and client retention necessities at their firms; and that they are more trend followers than they should be; and that they can't see trend reversals in future (particularly due to exogenous shocks like perhaps a war in the Ukraine).

Given those qualifying statements, it may be reasonable to assume that a +/- 20% factor should be applied to the Street price gain targets, even in the absence of trend reversals or major exogenous shocks.

Using a +/-20% collar, the 7.73% 12-month target of about 1995 would be bounded by 9.28% (to about 2024) and 6.19% (to about 1967) from the recent price level around 1850.

These projections are at the high end of the projections made by major groups in December of 2013 shown here:

With corporate profits at a record 9.69%, and revenue growth still subdued, assuming multiple expansion on forward earnings going from the current 15.4x to the 16.4x and 16.9x of the collar may be aggressive.

The current forward P/E on operating earnings is slightly above the level at the peak in 2007. 16x is meaningfully above that level, although stock market valuation was not the cause of the 2008 crash.

S&P 500 Sectors:

Segmenting the Street opinions by sector and applying the weights within each sector the Street projects 12-month price gains from 0.35% for Utilities to 11.07% for Consumer Discretionary.

For the tracking ETFs, the total return including dividends would be about 3.90% for Utilities (NYSEARCA:XLU) and about 12.35% for Consumer Discretionary (NYSEARCA:XLY).

This table shows the Street price gain estimate by sector for the market-cap weighted index (proxy SPY) and the equal weighted index (proxy RSP), along with the number of analysts and the maximum and minimum gain for individual constituents of each sector.

There is no S&P 500 sector ETF for Info Tech or Telecom separately. Vanguard's VGT and VOX cover those sectors, but are not limited to the S&P 500.

Because returns are additive in a portfolio (note that volatility is not), if you blend the Info Tech and Telecom weights and returns, you might expect XLK (the Technology ETF) to generate a price return of about 10.39%.

The nine SPDR sector ETFs are expected, based on the table above, to rank in order from highest to lowest Street estimated 12-month price return as: XLY, XLK, XLV, XLE, XLI, XLF, XLB, XLP, XLU.

The SPDR sector ETFs estimated to outperform the S&P 500 would be XLY, XLK, XLV, XLE, XLI.

Basic Materials has the stock within the S&P 500 with the highest estimated gain, and Financials have the stock with the largest estimate price decline.

Illustration of Large Opinion Divergences Between Analyst:

We identified the stocks within each sector with the highest and lowest price change targets, and then compared the Street opinion about each of those stocks with the opinions from Thomson/Reuters StarMine, S&P Capital IQ and Value Line.

Should you want to perform this sort of analysis yourself, you can subscribe to various expensive sources, or you can get free online and in library data.

Examples of free online data would be Street ratings at Yahoo Finance, StarMine ratings at Fidelity , S&P ratings at Schwab and Fidelity, and Value Line in paper reports at your library. It helps to have software to capture, cross reference and compute what needs to be computed, but it can be done by hand.

This table shows how widely divergent Street analyst views are per stock.

The stocks under "MAX" have the highest average rating in their sector, and the stocks rated "MIN" have the lowest rating in their sector. The "% to HI" and "% to LO" show the difference between the current market price and the high and low price targets submitted by analysts.

Netflix (NASDAQ:NFLX), for example, has a 12% average Street estimate, and a +/- 50% price change target among the 31 analysts reporting their views.

You really have to decide who to follow or do your own work, as this table suggests. It is certainly an argument for diversification, and perhaps an argument for broad indexing. It is at least a warning to look closely and do your homework if you invest in individual stocks.

Sector MAX % Chg to MIN % Chg to
HI est LO est HI est LO est
Materials MOS 18.0 (13.0) X 33.0 (33.0)
Energy NFX 5.0 (60.0) HP 10.0 (30.0)
Industrials ADT 97.0 6.5 DE 21.0 (23.0)
Info Tech CRM 47.0 (57.0) FSLR 28.0 (38.0)
Consumer Discret. AMZN 53.0 0.9 NFLX 50.0 (50.0)
Consumer Staples AVP 64.0 (8.0) CPB 2.7 (17.0)
Financials C 46.0 9.6 PLD 17.0 (27.0)
Health Care VRTX 76.0 4.1 EW 21.0 (20.0)
Telecomm VZ 22.0 (4.6) FTR 8.5 (37.0)
Utilities NRG 21.0 (10.0) EXC (1.5) (41.0)

Now looking at StarMine, S&P and Value Line versus the Street estimates, the divergence is further clear, but with disclosed analyst organizations behind the different opinions.

The first table is for the highest average scoring stocks per sector according to Street view, and the second table is for those with the lowest average scores.

First Call rates 1-5 (1 best). StarMine rates 1-10 (10 best). S&P Captial IQ rates 1-5 (5 best). Value Line rates 1-5 (1 best).

The Street view (Thomson/Reuters First Call) is positive about Amazon but all three of StarMine, S&P and Value Line are negative.

For Avon the Street and StarMine are neutral, but S&P is Bullish and Value Line is Bearish, for example.

Netflix scores neutral with the Street and S&P, but favorably by ValueLine and downright SELL at StarMine.

First Solar is low neutral by the Street, a clear SELL at StarMine, Bullish by S&P, and neutral by Value Line, as further examples.

If you are in harmony with the philosophy and method of an analyst, it may make sense to go with them, but it could be dangerous to go opinion shopping among analysts. Perhaps better to take the winners and losers from an analyst you know, trust and understand, than relying on a black box opinion or the averages of clusters of analysts with highly divergent views.

Available Data File Download:

If you have use for the Street average opinions for the S&P 500 constituents, visitors who opt-in to our mailing list can download the Excel file at this link at our "Rational Risk Equity Income Investor" site.

This image shows what the file looks like when you open it.

Disclosure: QVM has positions in SPY and XLI as of the creation date of this article (April 9, 2014). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.

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