by Bill O’Grady & Mark Keller
Summary: This report is an addendum to our original 2016 forecast. In our original 2016 Outlook, we forecasted a year-end S&P 500 of 2214.39, based on earnings of $121.67 and a P/E of 18.2x. As we will document below, we have revised our forecast to 2033.35, with earnings of $109.32 and a P/E of 18.6x. There are two factors behind the lower adjustment. First, our forecast for profit margins has contracted, and second, economic forecasts have been revised lower. The slowdown in economic growth, as forecast by the Professional Forecasters Survey from the Philadelphia FRB, accounts for $2.45 of the decline in earnings. The drop in expected margins accounts for the remaining $9.90.
For now, we have not changed our interest rate forecasts even though the 10-year yield is below the lower end of our forecast range. We expect a recession to be avoided which likely means that yields will move back into our expected range in the coming weeks.