The Dow Jones Industrial Average reaching 40,000 was a milestone for investors last week, but a top Wall Street forecaster sees even bigger gains ahead, thanks to earnings.
Yardeni Research's chief investment strategist, Ed Yardeni, told clients in a note that the index DJIA was on track for a 50% rise to 60,000 by 2030, and the S&P 500 SPX could see a rise to 8,000. The Dow closed above 40,000 for the first time ever on Friday.
For the Dow, that represents a 7% compound annual growth rate, and a 7.1% annual growth rate for the S&P 500.
"That target could be achieved with a forward P/E [price/earnings estimate] of 20 and forward earnings at $400 per share, up 60% from an estimated $250 per share this year. We think that's possible in our Roaring 2020s scenario," said Yardeni.
Yardeni's Roaring 20s scenario assumes S&P 500 companies collectively report earnings per share growth of at least 8.8% per year, the historical average rate since 1936. If growth rates of nominal and real GDP exceed their averages of 6.3% and 3.1%, respectively, since the last 1940s, that EPS expansion could speed up.
"That could happen if productivity grows faster than its average of 2.0% since 1951, as we expect in our Roaring 2020s scenario," Yardeni said.
"Better-than-expected productivity growth would result in better-than-expected growth in real GDP. It would depress unit labor costs, which is the underlying rate of inflation. It would allow wages to rise faster than prices. It would boost profit margin," he said.
Yardeni said industry analysts are increasingly as bullish as he is, with consensus revenue and earnings estimates implying projected profit margins of 12.6% this year, then over the next two years, 13.6% and 14.4%.
Last December, the strategist predicted the S&P 500 would reach 6,000 within two years. He correctly predicted a rally for the index last year, and his 5,400 target for the S&P 500 for 2024 is among the highest on Wall Street.