Raising S&P Target to 9,000

We are increasing our S&P 500 index target to 9,000 due to the announcement of the opening of the Strait of Hormuz pursuant to a peace agreement to be signed on June 19^th.  S&P 2027 earnings estimates have risen 12% since we established our 8,000 year-end 2026 target in December and we are using the same 23x fair value multiple that we used in our original target.  We are currently not experiencing a stock price bubble but rather an earnings estimate surge as the AI boom causes a dramatic increase in long term earnings estimates.

After the reopening of the Strait, we forecast that oil prices will rapidly decline below $70/barrel as we expect the Saudis and other OPEC members to ramp up to maximum production levels  in order to maximize revenue and rebuild global inventories.  Oil prices below $70 will result in a rapid decline in inflation as the decline flows through to core CPI, and reported shelter inflation continues to slowly reflect declines in market rents.  In addition, tariffs will be rolling out of the numbers as most increases were implemented one year ago.  We expected reported PCE to decline to below the Fed’s arbitrary 2% target over the next year.  Real time, market-based inflation was already below the Fed’s target prior to the oil price spike.

We forecast that these declines in reported inflation will cause Fed Funds futures to price in 3 cuts over the next year which will drive the 10-year below 4%.  The 10-year normally trades at 100bp over the expected terminal Fed Funds rate.  Therefore, the 10-year yield will trade down as soon as rate cuts start to be priced into Fed Funds futures.    A 10-year rate below 4% justifies our aggressive 23x multiple implicit in our 9,000 target.  Every 25bp change in the 10-year rate translates into a one-point change in the theoretical target earnings multiple.