The S&P 500, at 2266, currently sells for a price-to-earnings multiple (PE ratio) of 24.82 (trailing 12 months) with a dividend yield of 2.07%. The current consensus estimates for S&P 500 earnings would put the index at a forward PE of 18.92.
What if the S&P 500 could earn $130 in earnings per share in 2017? At today’s forward PE, the S&P 500 would trade at 2460. This implies a gain of 9% from today’s levels, not including dividend income. And if the market were to trade at today’s trailing PE ratio at the end of 2017, with $130 earnings in the can, we’d be looking at an S&P 500 north of 3200.
Is $130 feasible? Goldman Sachs lays out the upside scenario for how something like that could come about. Bear in mind that even if it happened, there’s no telling what sort of PE ratio the market would want to put on it at that point.
Goldman’s strategist David Kostin makes the case that multiple expansion is unlikely from here, so earnings growth (both operating and adjusted) will have to get the job done for further upside. I agree with this opinion. Let’s have it.
Where to Invest Now
Goldman Sachs – January 2017