Asset Allocation Chart of the Month
Stock Market Price Targets: Dead Reckoning
- As we near year end, strategists are often asked to predict where the S&P 500 will end the next year.
- If we look at past forecasts from strategists, the record is not encouraging. Over the past 20 years, the average margin of error has been ±16 percentage points. While this might seem poor, it reflects the complexity of the task given the factors involved.
- Setting a price target for the S&P 500 typically involves two key steps: estimating earnings and applying a P/E multiple to those earnings. It sounds easy, but it is not.
- First, what earnings should be used? Many assume it’s the upcoming year’s earnings, but that’s not the case. As we approach the end of 2024, the market is attempting to discount expected earnings for next year, not this year. That means we need to know what strategists think 2026 earnings will be at the end of 2025. We’ve yet to build a model that can do that.
- Next, assigning a P/E multiple is just as tricky. This requires anticipating investor sentiment at the end of next year. While multiple factors influence the market’s P/E, sentiment tends to be the most significant in the short term. A minor miscalculation—off by just 1 P/E point—would skew the price target by 5%. Historically, market multiples tend to fluctuate by more than 2 points within a calendar year.
- Despite the complexity and risk of error, we do formulate price targets—or more accurately, risk and return forecasts —for all the asset classes we track. Rather than relying solely on the traditional earnings and P/E approach, our method resembles dead reckoning. We start with our base case for the economy, financial conditions, risk factors, and valuations. We then use historical patterns to estimate an expected risk and return profile. Currently, we are forecasting a return of 5%-10% for the S&P 500. However, this forecast will likely evolve throughout the year as conditions change.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA - Vice President and Senior Fixed Income Strategist, and Brian Cheyne, CFA, CIMA - Senior Investment Strategy Specialist, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800-638-8194 for more information.
A Word About Risk
Investing in fixed-income securities which can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities which may be downgraded by a Nationally Recognized Statistical Rating Organization (NRSRO) to below investment grade status. U.S. government agency securities which are neither issued nor guaranteed by the U.S. Treasury and are not guaranteed against price movements due to changing interest rates. Mortgage-backed securities and asset-backed securities are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. Foreign securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. Emerging markets securities which are more likely to experience turmoil or rapid changes in market or economic conditions than developed countries.
Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
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