2021 Year End S&P500 Outlook

In 2021 the S&P500 has grown 14.10% (06/25/2021). Fear as result of Treasury bond yield and inflation increase has led many to believe that the equity market is heading downward. We share the same opinion. We have developed 24 different possible scenarios for the next 6 months. All of them are expecting the S&P500 to drop at least 19% and at most 23% by the end of 2021.

The fair value of the S&P500 was estimated using our proprietary model described in more details in here. We have then estimated the year end value of the macroeconomic parameters used to feed the model under different assumptions. The model inputs and their expected values under different scenarios are described below.

US Gross Domestic Product (GDP):

• 4.11% growth in 2021 ($22,968B); historical average trend.
• 5.14% growth in 2021 ($23,195B). Nominal growth increased by 25% by expecting a re-launch of the economy due to the easing of the COVID 19 restrictions.

M2 US Money Stock:

• 6.46% growth in 2021 ($20,649B); historical average trend.
• 15.08% growth in 2021 ($22,320B); annualized growth of the first 4 months of 2021.

BAA Corporate Bond Yield Relative to Yield on 10-Year Constant Maturity (BAA-10Y):

• 0.96%. In this scenario, it is assumed that the spread keeps on decaying at the same rate as after the March 2020 spike.
• 2.18%. In this case, it is assumed that the spread will be equal to the average of the 12 months prior the March 2020 spike.
• 2.77%. In this scenario, the BAA-10Y grows from the current value at a rate of 4.76% per month as during the stagflanation period of 1970’s.

US Consumer Price Index (CPI):

• 4.88% increase in 2021 (274.34); historical average trend.
• 7.32% increase in 2021 (280.72). In this scenario, CPI grows at the same rate as during the stagflanation period of 1970’s.

A full factorial combination of the different estimates of the parameters used to feed the model resulted in 24 different scenarios to estimate the S&P500 value by the end of the year. In Table 1 it is reported the value of each parameter used in each scenario and the estimated fair value of the S&P500 by the end of 2021. The upper and lower estimated have been calculated assuming plus/minus 2 standard deviation.
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Table 1: Expected value of the S&P500 by the end of 2021 under different scenarios.

In conclusion: given the current economic environment and the expected macroeconomic trends, according to our model, it is expected that the S&P500 might close 2021 between 3,050 and 3,462.

​The question is: is this going to happen? We need to keep in mind that there is a difference between fair price and actual price. As long as there are buyers, prices can stay where they are or even go higher. This can be noted during the Dotcom bubble in which there has been a large discrepancy between actual and fair value of the S&P500; see Figure 1. But… if there is an event that will trigger a sell-off then we know where the index might land.

​Figure 1: Actual and modeled S&P500 index; reference here.