S&P 500 Contest: Gains So Far, But Will They Last?

Image: One of the S&P 500 Market Prediction contestants around 4:00PM on 29 Dec. 2023, perhaps?

S&P 500 Forecast Update

Despite already a 6% increase in the value of the S&P 500 index so far in January, I do not see the index ending 2023 very far from its starting point. My analysis indicates most of the increase in January was sector specific involving large share price increases for a limited number of stocks in the Communication Services and Information Technology sectors. Share prices for these stocks have already retreated by 1% to 2% and up to 6% since I completed my analysis based on Jan. 27 closing prices. Based on SA author and SA Quant ratings of mainly Hold for the stocks contributing most of the increase in January, I do not expect those increases to be repeated in February.

My S&P 500 Forecasting Approach

I adopted a Pareto style approach, carrying out detailed forecasting for each of 50 tickers (top 50 of the 503 tickers as at Dec. 28, 2012) which contribute a little over 50% of the S&P 500 (SP500) index value. For the balance 453 stocks I estimated a 5% overall increase in total market cap. I did this on the basis I believe there’s still a considerable appetite for stocks, tempered over the last year by interest rate increases and the threat of further rate increases. I believe the effects of interest rates are likely now fully absorbed and that appetite for stocks will result in increased buying interest. So far to date the S&P 500 has increased by 6.0%, from a close of $3,839.50 on Dec. 30, 2022 to a close of $4,070.56 on Jan. 27, 2023. I provide an analysis of how each of my chosen top 50 tickers at Dec. 28, 2022 are performing so far against my forecasts for them (the top 50 might have had some exclusions and new inclusions, but I will necessarily stick with my original top 50). That will then allow me to assess how the balance of the index is performing. Table 1 below analyses the S&P 500 index between my selected top 50 tickers by line item and the balance as one line item.

Table 1

In Table 1 above, I compare the estimated market caps for my selected top 50 tickers from the S&P 500 index at Jan. 27, 2023, to estimated market caps at Dec. 30, 2022. By dividing the total estimated market cap of the selected top 50 shares, by their percentage of the index value, I can calculate the estimated market cap of the total 503 shares in the index at both Dec. 30, 2022 and Jan. 27, 2023. By deduction I can then determine the percentage and estimated market cap of the balance 503 shares in the index. I can then analyse the total index value into selected top 50 stocks and balance 453 stocks. This allows me to calculate, for the period Dec. 30, 2022, to Jan. 27, 2023, the selected top 50 stocks index value has increased by 6.2%, the balance 453 stocks index value has increased by a slightly lower 5.8%, resulting in a total index value increase of 6.0%, as mentioned further above. As mentioned above, in my S&P 500 forecast, I allowed for a 5% increase in the total of the balance 453 stocks portion of the index between end of December 2022 and end of December 2023. With less than a month gone that portion of the index has already increased by 5.8%. I did not forecast the 453 stocks by ticker, so I cannot analyze the change by ticker. But I did forecast the selected top 50 by ticker and my further analysis of the total 6.2% change in those 50 might also provide some clues to reasons for the 5.8% total change in the 453.

Further Analysis Of Selected Top 50 Index Change

Table 3 below shows details of changes in individual stocks causing most of the change in the selected top 50 index value total increase of 6.2%.

Table 3

Table 3 shows 92.6% of the change in the selected top 50 stocks came from just 12 (24%) of the 50 stocks. Of these 12 stocks (11 corporations combining Google (GOOGL) and (GOOG)), seven were from Communications Services sector, two from Information Technology sector, and one each from Consumer Discretionary, Financials, and healthcare. All of these stocks recorded at least a 12% change between Dec. 30, 2012 and Jan. 27, 2023, with Pfizer (PFE) (healthcare) the only one of the 12 to show a decrease. The remaining 38 stocks in the Top 50 showed a minimal increase in total of just 0.7% for the period, with no individual increases above 12%. It is clear that stocks from the Communication Services and Information Technology sectors have been the main drivers of the overall 6.2% total increase in the selected top 50 stocks. It’s possible a similar analysis for the balance 453 stocks might yield a similar result. If that were the case it would suggest the market in January was generally flat, with the exception of two sectors where increases were influenced by sector specific factors, rather than interest rate expectations or other factors. To get an idea what direction the Communications Services and Information technology sectors might head from here I put together Figure 1 below. Figure 1 shows latest SA Contributor article headings and ratings, and the Ratings Summary for the six Communications Services and two Information Technology stocks included in Table 3 above.

Figure 1

In the Ratings Summaries, SA Authors have rated four of the stocks a Hold, and four a Buy. Wall Street rates all eight a Buy, including Strong Buys for Amazon and Alphabet. SA Quant rates Alphabet a Strong Buy, and the remaining seven a Hold. Setting aside the optimism of Wall Street, I would conclude, apart from Alphabet, the general attitude is one of caution. On that basis, subject to how earnings are received, the significant growth in the two sectors in January will likely not be repeated in February.

Monitoring earnings of the top 12 movers –

We will soon enough know how the earnings for the main movers per Table 3 above are received. Table 4 below shows the earnings release dates for the 12 stocks (11 companies).

Table 4

Table 4 shows four of the 11 already have reported, three with earnings beats and one miss. Another five are due to report in the next couple of days, and the remaining two by Feb. 22. Table 4 also shows share price of 10 of the 11 companies declined between the Jan. 27 prices on which my analysis is based and Jan. 30 prices. It will be useful to watch earnings releases and share price movements over the next few days to see how these 12 companies fare. Of course a strong beat or miss for one company can impact not only that stock but also have a wider impact on other companies in the sector.

FOMC Meeting January 31 And February 1 –

Having the FOMC meeting and its announcements occurring at and around the time of the earnings releases for the 11 companies might confound analyses of reasons for any share price movements. My feelings on the FOMC is if it maintains an unaltered message, the market has already priced in existing expectations, and the impact on the market will be minimal. If the FOMC delivers an altered message I believe that will be bad for the market, whether the message is one of easing or tightening. Easing would likely cause concerns that inflation might remain unchecked and tightening would likely cause the market to fear an extended recession.

Summary and Conclusions

The above review has only covered a period of less than a month along the way of tracking a 12-month forecast. Only a handful of the included companies have reported their December quarter earnings so earnings beats and misses have not had any significant impact yet. I will plan to provide a further update when the majority of earnings releases have been completed and the FOMC decisions and statements are known. The tables above reflect the impact of changes in float shares and share prices. As earnings are released it will be meaningful to provide further analyses of share price changes into components of P/E ratio and EPS based on analysts updated EPS estimates. I’m still comfortable with my estimate of a 5% increase over the full year, for most stocks, and that would not be inconsistent with the small increase so far for stocks outside the Information Technology and Communication Services sectors. Based on my analysis of the S&P 500 change to date in January, I do not see either the high or the low forecasts in the SA stock prediction contest being reached, with the likelihood the S&P 500 index value will oscillate fairly narrowly above and below its starting point. The index already has retreated by 1.3% the day after completion of my update analysis. My Dec. 28, 2022, prediction was for the S&P 500 index to end 2023 at $3,845. If I were to give a range I would say 5% either side which would give a low of $3,653 and a high of $4,037. The index value of $4,017.77 at close on Jan,=. 30, 2023, is within that range. I would say actions for investors would be to watch closely for any changes in expected rate increase of 25 basis points, and any change in the tone of the message from the FOMC on future directions. No change in either area and I expect the outcome will be neutral for the market, or slightly positive. Any change expect to be bad for the market, because the market is very wary of unexpected changes in direction, and often assumes worst case scenarios, while it digests the full impact. The other action for investors would be to follow the earnings releases for the companies in Table 4 and, for beats and misses, try to make an assessment if results are purely attributable to individual company performance, or if results are impacted by external conditions favorable or unfavorable to all of the companies in the sector.