Highest 6000 points? Analyst: SPDR S&P 500 could rise at least 10% by 2024

The US economy is a consumer-driven economy, with the amount of money left over after spending on basic necessities such as housing, food, and fuel being directly proportional to the middle class. These disposable incomes drive consumption, thereby affecting the stock prices of the majority of companies that make up broad stock indices such as the S&P 500. Since 2009, Seeking Alpha analyst Sanjeev Sharma has been predicting the direction of the stock market based on factors such as wages, housing prices, gasoline prices, inflation, and interest rates. Interest rates are the most important factor as they affect people's borrowing capacity. In 2014, Seeking Alpha published a formula explaining the impact of these factors on the stock market (the 2014 Sharma Disposable Income Formula).

The following analysis examines these factors and other important factors for 2024:

Population Issue

Firstly, regarding the population issue, when using the formula to predict the stock market since 2009, Sharma's biggest concern was the decline in US population growth in recent years. About half of the states in the US have experienced population declines in the past few years. This could lead to a situation similar to Japan, where consumption, housing, and the stock market may decline together over several decades. Although the politically sensitive issue of the open southern border is of great concern to many Americans, population growth contributes to the economy in the short term. Texas and other states add approximately 2.5 million people each year (US Department of Homeland Security website), ensuring that the consumer-driven US economy continues to grow in the coming years.

Election Year Fiscal Spending

2024 is an important election year for the US (as well as some other major economies), and it is expected that the government will engage in active spending to boost the economy. Typically, in election years when the incumbent president is running for re-election, both the stock market and the economy tend to grow. In fact, the US Treasury borrowed over $1 trillion in 2023, and I can speculate that some of it will be spent in 2024.

Wage Growth

After multiple interest rate hikes, the Federal Reserve has been able to slow down the pace of wage growth, from nearly 7% per year two years ago to around 5% per year now. With the Federal Reserve announcing a rate cut in 2024, the decline in wages may not continue, and Sharma expects wages to continue to grow at the current rate of around 5%. Inflation Rate and Gasoline Prices

Although the inflation rate grew by over 9% last year, it has now dropped to 3% due to the active efforts of the Federal Reserve. By the end of 2024, it may reach the target of 2%.

2024 is an election year, and the current US government must ensure that natural gas prices are affordable. Although prices did rise in mid-2023, they have now fallen back to the levels at the beginning of the year. Despite OPEC's recent production cuts, it has been unable to curb the decline in prices due to increased production from non-OPEC countries. Sharma predicts that gasoline prices will see a slight increase by 2024, with a rise of around 10% due to interest rate cuts and proactive government spending before the major elections, as well as global economic growth.

10-Year US Treasury Yield

During 2023, the 10-year Treasury yield increased by over 1%, rising from 3.8% to 4.9%, but it has now dropped to 3.9%. With the Federal Reserve lowering short-term interest rates and the decline in inflation, long-term US Treasury yields will face downward pressure. Sharma predicts that the 10-year US Treasury yield will decrease by approximately 50 basis points, but the decline will not be significant due to healthy growth in the economy, inflation, and wages.

To calculate, Sharma will consider two scenarios: one with no change and the other with a 1% decrease. The impact of the 10-year US Treasury yield on the S&P 500 P/E ratio: historically, when the 10-year US Treasury yield was at 5%, the equivalent P/E ratio of the 10-year US Treasury was 20 times, while the P/E ratio of the S&P 500 index was 15 times, representing a 25% discount due to additional risk. Now, with the 10-year US Treasury yield approaching 3%, the P/E ratio is 33, and the discounted P/E ratio of the S&P 500 index should be 24 by the end of 2024. Housing Price Issue

Due to the threat of economic recession, housing prices in the United States began to decline in 2022 and hit bottom in the first quarter of 2023. However, as the economic recession never occurred and dual-income households have become the norm in the United States, consumer confidence is high, and we can once again see an increase in housing prices. In addition, consumers are now looking for new modern homes, which have limited supply. I expect housing prices to continue to rise, with a possible increase of around 5% in 2024.

Key Risks and Factors

Population growth leads to consumption growth, which is crucial for the economy and stock market. So far, immigration has been helping the population growth in the United States, but if populist ideas significantly curb immigration, it will have a negative impact on the economy and stock market. Secondly, if the Russia-Ukraine war and conflicts in the Middle East escalate and affect food and oil prices, leading to higher inflation, it will have a negative impact on the economy and stock market. Thirdly, a weak US dollar may have a negative impact on the stock market as it would push up inflation in the United States.

Now let's plug these numbers into the disposable income formula:

Conclusion

In 2024, the best-case scenario is that the S&P 500 index will rise by more than 30%, and the worst-case scenario is an increase of over 10%. The average of the two is 21%. Based on the current level of the S&P 500 index at 4800 points, the average level for next year is projected to be 5800 points, with the best-case scenario being that the index will rise to over 6000 points.