Investing.com -- Analysts at Capital Economics said in a research note Monday that they are maintaining their 2025 year-end forecast of 7,000 despite the slump last week following the FOMC meeting.
"We are sticking to our forecast that the S&P 500 will end next year at 7,000," the firm declared.
The forecast comes despite the belief that “Fed policy will be a bit less accommodative” than they had previously projected.
The firm noted the slide in the S&P last week appears to have been driven by a significant sell-off in the government bond market.
“All else equal, this makes sense,” said Capital Economics.”Nonetheless, our view is that the 10-year TIPS yield - which is typically used as a proxy for this risk-free component because equities are real assets - won’t end next year higher than it is now.”
Capital Economics also said it is worth stressing that the outlook for the S&P 500 “doesn’t just depend on what happens to the risk-free component of its earnings yield,” noting that the relationship between the S&P 500 and its forward twelve-month (FTM) earnings yield had broken down since late last year.
This is said to be based on the S&P 500 FTM earnings per share having grown rapidly, driving up the index regardless of what has happened to the FTM earnings yield and the fact that the FTM equity risk premium (ERP) has fallen sharply.
“We suspect that S&P 500 FTM EPS will continue to grow a bit next year,” adds the firm. “We also envisage the index’s FTM ERP shrinking further then, even though it’s already quite low.”
The analysts conclude: “The FTM ERP remains well above the trough it reached before the dotcom bubble burst, which was the end of the last period during which we saw the US stock market soar amid enthusiasm for a transformative technology.”