It was another weekend of head-spinning news, but we are no closer to figuring out what the right level should be for stocks. The good news is that while President Donald Trump has a higher pain threshold than most thought, there is a pain threshold, and the tariff exemption on the electronics industry means that a tech earnings collapse is far less likely. The bad news is that trade policy is now completely dependent on day-to-day negotiations and mood swings, which makes it very difficult to argue for any kind of serious rally, and stagflation worries are not going away. Low visibility into 2025 earnings As for earnings, there is no consensus on the two most important determinants of stock prices: The actual dollar level of earnings growth for 2025, and what the correct multiple should be, which is how much an investor would be willing to pay for that future stream of earnings. The dollar level of earnings growth for 2025 is now $267 or up roughly 10%, but there is little confidence in that projection. Depending on whom you ask, it could be somewhere between that level and $242, which is no growth at all in earnings, or could be as much as down 20%, which would be a recessionary decline for earnings. S & P 500 2025: What’s the right earnings level? $267: up 10% (current consensus) $242: up 0% $193: down 20% (recessionary decline) Source: LSEG A decline of 20% in earnings may seem extreme, and while it is unusual, it is not unprecedented. There have been four occasions in the past 25 years where the earnings for the year were 20% below the estimate at the start of the year: 2001, 2008, 20098, and 2020, according to FactSet. It’s the same problem with the multiple. The current multiple of 19 for 2025 earnings has come down from 21 a month or so ago, but multiples above 17 are typically given when the economy is expanding, and that is not happening. So what’s the right multiple? Depending on whom you ask, it could be anywhere from 17, which is an historic average multiple, to 14, which is a recessionary multiple. S & P 500 2025: What’s the right multiple? 19: current multiple 17: historic average 14: recessionary multiple Source: LSEG Mix and match the actual dollar earnings estimate with the multiple, and you can get an enormous variation in where the S & P 500 should be. Are you an optimist or a pessimist? On an optimistic scenario, you could assume the majority of the tariffs go away, the status quo prevails and the U.S. avoids a recession, at which point perhaps earnings up 10% and a multiple of 19 (the current consensus) could work. A more “realistic” but still optimistic scenario would be that tariffs of some sort are still in place, earnings rise only 5% (half what is expected), and the multiple will contract to 18 from 19. This brings you to 4,572, still roughly 800 points below the current level. The right price for the S & P 500: Optimistic scenario Current: earnings up 10%, multiple 19: 5,363 Earnings: up 5% ($254), multiple 18: 4,572 It’s easy to get even more pessimistic from here. Assume zero earnings growth ($242) with an historic average multiple of 17 and you get 4,114, about 23% below Friday’s close. If earnings drop 10% ($218) you are at 3,706. If they fall 20%, you are in the 3,200 range. The right price for the S & P 500: pessimistic scenario Current: earnings up 10%, multiple 19: 5,363 Earnings up 0%, multiple 17: 4,114 Earnings down 10%, multiple 17: 3,706 Earnings down 20%, multiple 17: 3,281 This is why the market is gyrating daily. This is why you get these kind of daily price swings in the past seven days: Friday: up 1.8% Thursday: down 3.5% Wednesday: up 9.5% Tuesday: down 1.6% Monday: down 0.2% Friday: down 6.0% Thursday: down 4.8% No one can figure out the right level.
