With 2020 coming to a close, analysts are making predictions for the closing price of the S&P 500 for next year. A number of market strategists (typically using a top-down approach) believe the S&P 500 will close at or above 4000 by the end of 2021. Do industry analysts (using a bottom-up approach) also believe the S&P 500 will close at or above 4000 at the end of 2021?
The answer is yes. Industry analysts in aggregate predict the S&P 500 will have a closing price of 4000.08 in 12 months. This bottom-up target price for the index is calculated by aggregating the median target price estimates (based on the company-level target prices submitted by industry analysts) for all the companies in the index. On December 10, the bottom-up target price for the S&P 500 was 4000.08, which was 9.1% above the closing price of 3668.10.
At the sector level, the Consumer Discretionary (+14.3%) sector is expected to see the largest price increase, as this sector has the largest upside difference between the bottom-up target price and the closing price. On the other hand, the Energy (+2.0%) sector is expected to see the smallest price increase, as this sector has the smallest upside difference between the bottom-up target price and the closing price.
However, it is important to note that industry analysts have historically overestimated the closing price of the index at the start of the year.
Over the previous 15 years (2005 – 2019), the average difference between the bottom-up target price estimate at the beginning of the year (December 31) and the final price for the index for that same year has been 9.3%. In other words, industry analysts on average have overestimated the final price of the index by about 9.3% one year in advance during the previous 15 years. Analysts overestimated the final value (i.e. the final value finished below the estimate) in 12 of the 15 years and underestimated the final value (i.e. the final value finished above the estimate) in the other three years.
However, this 9.3% average includes one year (2008) in which there was a substantial difference between the bottom-up target price estimate at the start of the year and the closing price for the index for that same year (+92%). If the year 2008 were excluded, the average difference between the bottom-up target price at the start of the year and the closing price of the index at the end of the year would be 3.4%.
If one applies the average overestimation of 9.3% to the current 2021 bottom-up target price estimate (assuming the estimate changes little between now and December 31), the expected closing value for 2021 would be 3627.96, which is 1.1% below yesterday’s closing price of 3668.10. If one applies the average overestimation of 3.4% (excluding 2008) to the current 2021 bottom-up target price estimate, the expected closing value for 2021 would be 3864.07, which is 5.3% above the December 10 closing price of 3668.10.
Thus, although industry analysts believe the S&P 500 will finish 2021 with at a price of 4,000, they also have overestimated the closing price of the index 80% of the time over the past 15 years. For 2020, despite the negative impact of COVID-19 on a number of companies in the index, it appears industry analysts will have underestimated the closing price for the index for the year back at the start of 2020. Will the 2021 target price prediction of the industry analysts follow the historical average of the last 15 years or buck the trend like 2020?
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