Nice earnings forecasts you have. Shame if something happened to them: Joachim Klement
SPY•Joachim Klement argues that unusually optimistic earnings forecasts could leave equities vulnerable if growth falls short. S&P 500 analysts forecast average annual EPS growth of 22.3% since 1992, versus 9.5% realized, and current long-term growth expectations stand at 16.7%.
1. Forecasts versus results
Since 1992, analysts forecast average annual S&P 500 earnings per share growth of 22.3%, more than double the 9.5% average realized. In months when S&P 500 EPS growth turned negative, the rolling 12-month rate averaged minus 4.5%, while consensus estimates at the start of those periods projected 18.8% growth.
2. Valuations and outlook
The S&P 500’s 12-month forward P/E ratio is 18.9, roughly in line with its 10-year average, but that measure assumes EPS growth of 38.6% over the next 12 months. Its trailing P/E ratio is 26.2, about 14% above its 10-year average. Klement says he believes a major bear market could begin within two years as the AI investment boom ends, and has forecast the index could fall to 5,000 by the end of 2027.
3. Long-term growth risks
The S&P 500’s long-term EPS growth forecast is 16.7%, placing it in the top 10% for this century. Klement notes that research found companies with the highest long-term EPS forecasts usually underperformed the rest over the following year; he names Nvidia, Advanced Micro Devices, Intel, Broadcom, Palantir and Micron among constituents with particularly high growth expectations.
