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Ed Yardeni predicts that the S&P 500 could reach 8,000 by 2030.
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Yardeni’s forecast is based on a simple analysis of historical growth rates.
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His bullish projection is supported by a ‘Roaring 2020s’ scenario in which productivity grows.
There’s a simple reason why one of the most optimistic Wall Street strategists expects the stock market to continue rising in the coming years: compound interest.
In a note Thursday, Ed Yardeni, founder of Yardeni Research, published a long-term chart of the S&P 500, which includes the index’s potential future trajectory based on compound annual growth rates.
At a compound annual growth rate of between 6% and 7%, the S&P 500 is on track to reach 8,000 by 2030, which represents a potential increase of about 40% from current levels.
Yardeni’s simple, math-based projection isn’t outlandish when you consider that the S&P 500’s long-term annualized growth rate is about 10% before inflation, and has been even higher over the past decade at about 13%.
Consistent earnings growth, favorable U.S. demographics and continued technological innovations have driven the S&P 500 higher, and these factors should support a rising stock market in the coming years.
“The S&P 500 stock price index is driven by earnings per share (EPS), which has typically grown between 6% and 7% since the 1950s,” Yardeni said.
He added: “In our Roaring 2020 scenario, earnings per share could double to $400 by the end of this decade,” Yardeni said.
Yardeni Research outlined its bullish ‘Roaring 2020s’ scenario earlier this year. The forecast calls for higher productivity to boost economic growth while keeping inflation subdued.
If the S&P 500 is trading at the 8,000 level with earnings per share of $400, this would imply a price-to-earnings ratio of 20x, which is below current levels but slightly above the index’s long-term average.
Finally, rate cuts by the Federal Reserve should serve as a new tailwind for stock prices in the coming years, although Yardeni has warned that they could only add fuel to the fire, leading to a melt-up in the style of the nineties, which would be followed by a painful relaxation.
“I have increased the chance of a full-blown melt-up, like in the 1990s,” Yardeni said last week. “I think by cutting rates by 50 basis points and signaling that they want to do more, based on some recent comments, they risk overheating a hot economy. The economy is doing quite well.”
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