The Dow Jones Industrial Average (DJIA) on Friday closed above the 40,000 threshold for the first time ever, driven by the latest leg up in the stock market rally after softening inflation data rekindled investor optimism about rate cuts.
Although the benchmark index has been trading below that historic level in the past few days, analysts at Yardeni Research maintain an optimistic stance about Dow’s long-term prospects, reiterating their target of 60,000 by 2030.
“Along the way, there could be corrections and even another bear market. But we expect that earnings growth, supported by productivity gains, will drive the stock market higher over the rest of the decade,” analysts wrote.
“Just for fun, we drew some trend lines on a chart of the DJIA and stumbled on a channel starting around 2010 that can be extrapolated to a range of 45,800 to 76,700 by the end of the decade. The mid-point is 61,250. Mark your calendars!” they added.
Yardeni notes that, according to Dow Theory, the recent rise of the DJIA to a new high may not be sustainable unless it is confirmed by the Dow Jones Transportation Average (DJTA), which remains below its record high.
They believe that leaner business inventories will soon boost demand for transporting goods, and relatively stable fuel prices will benefit transport companies and their stocks.
The analysts also point out that the DJTA's weakness may be partly structural, signaling that services are becoming more important to the economy than goods. Thus, it is possible that the DJIA could diverge from the DJTA sustainably.
Moreover, the market research firm highlighted an intriguing divergence between the forward earnings of the S&P 500, which are at a record high, and those of the S&P 500 Air Freight & Logistics industry, which are well below their peak.
“The former is getting a boost from the strength of the US economy, while the latter might be weighed down by weakness in the global economy and competition from Amazon (NASDAQ:AMZN),” Yardeni analysts noted.
Finally, analysts also reflected on the ongoing rollercoaster ride in the Bull/Bear Ratios (BBR). During the week of May 21, the Investors Intelligence BBR rose to 3.45, pointing to a significant shift back into the bullish camp, with 59.4% bulls and only 17.2% bears.
“There may be too many bulls again for the DJIA to decisively break out above 40,000 for now,” Yardeni’s team added.