S&P 500 = 7000, 2025 Reality Check

First off, I have to thank my Mom who passed away a number of years ago, much too early in her life, and my Dad, who is still going strong and playing a few rounds of golf every week as he approaches 92 in Atlanta, and God for bringing me into this world 59 years ago. Today is my B-day, And yes, 59 is finally starting to sound a bit old to me.

I’m keeping this one short, but I hope you pass it on to others and help me get my subscriber base above 1000 before 2025 begins.  Investors, we are in a bull market for equities.  We have been since at least 2011 secularly and cyclically since the October 2022 low as well as Oct 2023 pivot higher from 4150 on the S&P500.

In the mid to late 4^th quarter of last year, against many calls for a generational top or calls to play defense below line in the sand 4160 by a practitioner of EWT, I forecast that the markets as defined by the S&P 500 could get to an optimistic 5800 into yearend 2024 and 6000 into inauguration in Jan 2025. Yes, that was a move of up 1500 to 2000 points over 15 months or so. Most people looked at me and laughed.  And yes, I moved up that forecast to 6000-year end and 6200 into inaugural ball during the mid-summer selloff.

So we are pretty much there on time and at those levels and the question is now what.

Well go back about 2 months and pre-2024 Presidential election, we shot a video where I postulated that the S&P500 could get to 7000 by year end 2025.  It seems a few Wall Street statregists also heard that call and since the election the like of Tom Lee and a few others have moved their targets there.

Now investors, I do not know if we can get there.  But I do know how it would be likely.  First off, frequent listeners know, over the last 6 years at OHFG I have rarely if ever discussed or said the market was overvalued when it was up. Why because “valuation” is a horrible market timing tool for calling market tops.  It does work pretty well as finding bottoms in the markets as we have discussed a number of times in prior videos.

I’ve seen Many strategists and economists on TV and social media discussing how in their work, the markets were “overvalued”.  Now first, I must point out that I can’t find any of these people who have been right with their market calls the last 2-3 years, so I’m not certain why anyone would listen to them now.  Those using valuation as a tool have been uniformly bearish now for at least 2 years and in the case of Jeremy Grantham and others, 10 to 15 years.

If you want to talk valuations, lets start where we should. Not with stocks but with the bond market. Let’s look at the P/E of the 10 year Treasury bond which is the bond maturity that most quants use.  It’s long enough to encompass economic cycles and smooth out earnings.  A decade of data.  The yield on the 10-year Treasury is currently 4.165% comprising 1.9035% real growth and 2.268% 10 year inflation expectations.  Flip the 10-yr Treasury yield on its hear 1/.04165=24. Give’s you 24.  So the 10-year Treasury has a P/E of 24.  And we know that a bond cannot grow its earnings over the next 10 years.

If, one were to take the current S&P500 at 6025 and divide it by 24= about $250.  Meaning that “fair value” for the S&P500 is about 6025 at the current yield on 10 year Treasuries if you think the S&P500 earns 250/s.  If you think the right EPS number for 2025 is $275 due to lower tax rates, higher productivity, higher real growth, or lower regulation then you can get to a target of 6600 in 2025 pretty easily so long as risk free interest rates stay in this range.

But Chris that’s not 7000 like you postulated.  Remember, I haven’t forecasted 7000 for year end 2025 but I said it isn’t out of the question.  Right now, all the models I have point to 6600 as the most likely 2025 top, up about 10% from here.

So, Chris, how can you get to 7000, that extra 5%.

Well, I see 2 paths to that outcome. The first and easiest path to me would be, higher growth and lower inflation in 2025 leading to a rally in 10-year yields lower.  I’m sure many of you will tell me “Chris that can’t happen under Trump 2.0, because I  listen to all the economic masterminds on TV say lower taxes, higher tariffs, and higher deficits will cause higher interest rates in 2025!

Well, investors history would say they are wrong.  Heres a chart of 10 year Treasury yields in 2016/17 versus 2024/25.  Basically Trump 1.0 vs. Trump 2.0.  Those economic wizards you are listening to on TV fail to tell you that longer term interest rates fell by 50 bps in 2017 under Trump 1.0.  They didn’t rise.  Here’s the overlay.

Longer term interest rates rallied about 60bps from their mid-December 2016 peak to their mid-summer 2017 low.  A similar move now would take the 10 year yield, from about 4.5 % at election time to 3.9-4%.  The fair value PE for the SP500 at a 4% 10 -year treasury is?  25x earnings.  And at 3.9%, it’s about 25.65x.  25x$275/s in S&P500 earnings= 6875 on the S&P500 and at 3.9% 10 years yield its, presto 7051.

So that’s the first way I can get the market to levitate higher over 15% in 2025.  A Trump 1.0 economy repeat in 2025.  The second way, the way no one in their mind can fathom.  What’s that?  That’s a return to calm under DJT.

Come on Chris, you have lost your mind.  DJT was posting to Twitter all the time causing volatility in the markets in Trump 1.0!  Nope, that’s what most of the liberal biased press wants you to believe.  The facts are, under Trump 1.0, 2017, the first year of his presidency, was the calmest year in the US stock market, ever, in history, since data has been compiled.  Let me remind you what the cash SP500 did in 2017 under Trump 1.0.  Here’s the chart.

Yes investors, the largest drop in the cash S&P 500 all year, peak to trough was about -3.25% happening over 3 weeks.  And that -3.25 was if you were absolutely perfect selling the intraday high and buying the intraday low.  Investors, no one does that.  Absolutely no one.  Not Soros, Not, Druck, Not Dali, not Julian, not Steve Cohen, Ken Griffin and not even Nancy Pelosi.   If you do, give me a call, I’ll hire you or I’ll come work for you.  In 2017, the biggest peak to trough moves that I found looking back were, -1.47%, -3.28%, -2.13%, -1.88%, -2.95%, -1.52% and -1.96%.

Investors, that’s nothing.  Those are literally untradeable noises. Spot implied vol as measured by the Vix index, usually troughs at 12.  Before 2017 there were literally less than 10 trading days I found that it traded below 12.  During the summer of 2017, spot Vix hit a intraday low of 8.84.  After tax day in 2017, there were literally only 5 trading days the rest of the year that spot vol closed above 12.5, which is historically its lowest closing low. Here’s the Vix overlay then and now.

I know it sounds farfetched, but investors just in late October of this year, in front of all the election worries, the realized volatility level of the S&P 500 hit. 8.67 on 10/22. And that’s when investors were paying up for election insurance. When implied vol was close to 18-20, investors were overpaying by 200-225%.

Investors, if spot implied vol collapses to 8-9 like it did in 2017, a year I said up until about 2 months ago would never be repeated, the S&P 500 gets to 7000 in 2025.  Full stop.  It’s the math in the insurance markets.

I know I said it would never happen again in my lifetime, but if it’s going to?  2025 is likely to be the year. Why?  Tax cuts or extension. Higher employee productivity. Fullish employment, lower or stable inflation, Federal reserve cutting rates, peace in the Middle East? Peace is Russia/Ukraine?  China stimulates their local economy instead of worrying about Taiwan? No sellers or less insider selling of stocks due to low tax rates being extended out into 2026 and beyond at the same time 401ks are flush and buying stocks due to high employment?

Investors, S&P500 7000 in late 2025?  Is it doable in the next 12-14 months? The simple answer is yes.  Is it “easy”?  No of course not. Black swans can hit. The unforecastable can play out.  Maybe it is different this time. But investors before you dismiss myself, or the likes of Tom Lee, or Rich Ross, who have been more right than wrong over the ongoing bull market, in favor of those of retired billionaire hedge fund managers, or doomers like Jeremy Grantham, Robert Kiyosaki, or other newsletter writers who keep trying to scare you and have been horribly wrong, ask yourself.  Have they been right? Have they been right Lately? Have they been right Consistently? Or were they one hit wonders from years if not decades ago, who keep popping up in your social media feed because of a catchy computer algorithm that knows your age, gender and political beliefs?

Investors against the nearing decade long doomer calls from Jeremy Grantham, Harry Dent, and Robert Prechter that come on CNBC almost monthly to scare viewers.  We are in a bull market for equities in the US.

Until proven otherwise, my suggestion to you, trade or invest similarly to Trump1.0 for at least the early stages of Trump 2.0.  Why? Because it’s the same people doing the same things, and therefore the outcomes tend to be very similar. A similar outcome to 2017 for 2025 would be S&P500 7000.  And investors that would be one hell of a 60^th bday present for me and you a year from now on my 60^th bday in December 2025.  Time will tell.

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