S&P 500 3375 ? 2025 ?

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According to the latest Yardeni Research report ((yriearningsforecast.pdf (yardeni.com)) ), the forward P/E of the S&P appears to be balanced and not overheated. However, in light of Powell's hawkish tone yesterday and the potential for the US 2-year yield to exceed 5%, which last occurred in 2007 and led to a decline in P/E from 15 to 9 before rebounding to 15, a simple calculation assuming zero EPS growth over 2024 yields a target price of 225 x 15 = 3,375.

However, since the Fed was well behind the curve when inflation started accelerating, it is fair to assume that the Fed may underestimate the risk of a recession that could lead to deflation, along with a wave of defaults and liquidity drying up in banks, which would force them to increase deposit rates and create a credit crunch. To counterbalance these negative assumptions, it is also possible that investors are underestimating the risk of war. This morning, the German Defense Minister Pistorius stated that they will increase support for Ukraine if China supplies weapons to Russia. Therefore, the main NATO economies (US, UK, Canada, France, Germany) are unlikely to reduce their public spending, which could be supportive for consumers, as these policies are coordinated among countries. However, these policies may lead to a second round of overshooting inflation. In any case, inflation may accelerate again, leading to further rate hikes by the Fed. In a worst-case scenario, where inflation is out of control, the P/E of the S&P may come under pressure. Assuming a P/E of 9x, the S&P could fall to 2025. The way out may be a coordinated and orderly devaluation of the USD to mitigate the debt burden and maintain the US economy's competitiveness against other world blocks (such as non-NATO countries).