Joachim Klement says S&P 500 earnings forecasts leave stocks exposed

Joachim Klement’s S&P 500 forecast rests on a concern that earnings expectations are unusually high. In a Reuters commentary published Oct. 26, the Panmure Liberum investment strategist argued that stocks could be vulnerable if the profit growth built into analyst forecasts does not arrive.

For investors, the point is that a valuation can look less demanding when it relies on projected earnings rather than results already recorded. Klement’s article is opinion, not a confirmed prediction of a downturn, and he acknowledged that he cannot time the end of the current bull market.

Klement said the S&P 500 could fall to 5,000 by the end of 2027. He also said he believes a major bear market could begin within two years as the AI investment boom ends, while allowing that such an event might not occur until 2028.

Why does Klement think S&P 500 earnings forecasts are risky?

Klement pointed to the historical gap between expectations and results. Since 1992, he wrote, actual annual S&P 500 earnings-per-share growth averaged 9.5%, compared with average analyst forecasts of 22.3%.

He said the misses have been particularly pronounced when earnings contracted. In periods in which S&P 500 EPS growth turned negative, the rolling 12-month growth rate averaged minus 4.5%, according to his column. At the beginning of those periods, Bloomberg consensus estimates had projected growth of 18.8%.

The column cited the 1990-91 recession, the dotcom collapse, the global financial crisis, the 2015-16 earnings recession and the 2020 COVID-19 shock as periods associated with large forecast gaps.

What valuation assumptions did he highlight?

Klement contrasted the S&P 500’s 12-month forward P/E, based on forward EPS estimates, with its 12-month trailing P/E. He reported a forward multiple of 18.9 times, about in line with its 10-year average, but said that reading depended on EPS rising 38.6% in the following 12 months.

His reported trailing P/E was 26.2 times, which he said was about 14% above its 10-year average. Valuation figures can differ by provider, date and earnings measure. A Wall Street Journal market-data table dated Oct. 23 listed the S&P 500 at 23.27 times trailing earnings and 19.15 times forward earnings; it said its trailing figure used as-reported earnings while its estimate measure used operating earnings.

Klement also put the S&P 500’s long-term EPS-growth forecast at 16.7%, a level he described as being in the highest 10% of readings this century. He singled out Nvidia, AMD, Intel, Broadcom, Palantir and Micron as companies with particularly high long-term earnings-growth expectations. He said those shares could face greater exposure if growth falls short of consensus, rather than asserting that any company will miss forecasts.

This story draws on original reporting from Klement on Investing.