Two “Data” items today:
#1: In their weekly Earnings Insight report, FactSet noted that the aggregate S&P 500 12-month price target based on Wall Street analysts’ single-stock price goals is 5,225, 11 percent higher than Friday’s close. That got us to wondering: how often does this calculation deliver a useful/investable result?
To help us answer that question, FactSet published a useful chart with a comparison of Wall Street’s aggregate S&P price targets in solid blue (timestamped December of the previous year) and the actual results in shaded blue from 2010 to the present. Since the y-axis is S&P levels, we have added the percent difference between the Street’s guess and what ended up happening in the following year. Red numbers denote years when the Street was too high, and green shows when analysts were too conservative.
As you can see, analysts are finishing up their worst-ever miscalculation of US large cap stock valuations since at least 2010 (15.4 pct too conservative). The prior record was 2013 (13.3 pct too low), although 2018 is also worth a mention (13.0 pct too high). Over the last 12 years, analysts have averaged a 1.0 percent overly conservative price target “miss” to how the year turned out. It is worth noting, however, that until 2021 the average was close to zero, albeit with a wide variance in either direction.
As for how smart/dumb Wall Street’s current 5,225 S&P price target will look in 12 months’ time, all we can say with almost complete certainty is that it won’t happen the way analysts think it will:
- As of today, Street analysts are looking for 8 percent earnings growth next year ($222.71/share for the S&P 500, up from $205.46/share this year).
- It is hard to believe long term interest rates will be lower than they are today (1.48 pct 10-year Treasuries at Friday’s close), so we will not be getting a valuation tailwind from this quarter.
Takeaway: if 2022 does deliver an 11 percent return on the S&P 500, it will be entirely because Wall Street’s earnings estimates are too low. That is exactly what happened in 2021, with analysts starting the year expecting $167/share only for the index to end up printing +$200/share. As we often reiterate, we believe Wall Street continues to underestimate US corporate earnings power and we therefore remain positive on domestic large cap equities.
#2: Friday’s US Consumer Price Index inflation report, showing 6.8/4.9 percent year over year headline/core price increases, got a lot of attention and we have 3 points on the data.
First, here is how US inflation looks once you strip out gasoline and used cars (2 sectors with very high annualized inflation):
- Gasoline, which is 3.9 percent of the CPI, was up 58.1 percent versus November 2020. This added 2.3 points to headline inflation.
- Used cars, which are 3.4 percent of headline CPI and 4.3 percent of core inflation, were up 31.4 percent last month versus 2020. This category added 1.1 points to headline CPI inflation and 1.4 points to core inflation.
- Excluding these 2 categories, headline inflation was +3.4 percent and core inflation was +3.5 percent.
Takeaway: while 3.4 – 3.5 percent inflation is still higher than the Fed’s long-run goal of 2.0 percent, it is nowhere near 5 – 7 percent reported numbers. Yes, the Federal Reserve must act to cool inflation, and we expect to hear much more about that at Wednesday’s press conference. But should oil and used car prices really govern their response function? Probably not …
Second, US food inflation is a growing problem. The following chart shows both overall food inflation (blue line) and just meat, poultry, fish, and egg inflation (“proteins”, red line) from 1990 to the present.
The issue here is that protein inflation (12.8 pct in November) is running as hot as at any time since 1990. That is dragging overall food inflation higher (6.1 pct) and to levels only seen (briefly) in 2008 and 1990. This is affecting both “food at home” inflation (7.3 pct of headline CPI) and “food away from home” inflation (6.3 pct of headline CPI).
Takeaway: food prices directly inform consumers’ views on overall inflation more than any other single CPI category, aside from perhaps gasoline. The chief problem here is protein inflation, where supply chain issues are clearly lingering and rising fuel prices are also playing a role. On the plus side (sort of): thanks to an improving economy, most Americans can thus far pay higher food prices without cutting back on other purchases. Even still, food inflation needs to start declining – and soon – because it both threatens the Fed’s credibility with the general public and becomes a potent political issue the longer it lasts.
Lastly, housing inflation has come storming back and is now as strong as at any point in the last decade. The CPI measure here is Owners’ Equivalent Rent (OER), which is based on a survey of homeowners, asking them “how much would your house rent for?” and then tracking the responses over time.
The chart below shows OER inflation from 2010 to the present. As you can see, the recovery here has been swift (much faster than 2011 – 2012). On top of that, we are right up against the prior best comps of +3.6 percent in late 2016 with last month’s +3.5 pct increase in house inflation.
Takeaway: as much as many people criticized the OER calculation for underreporting actual house price inflation over the last year, it is clearly making up for lost time now. This is 24 percent of headline CPI and 30 pct of core CPI, and for much of the last decade OER was the mathematical buttress against very low or even negative CPI inflation. Note that it was +3 percent all of 2016 – 2019, when CPI struggled to stay over 2 percent. Going into 2022, OER may well be the factor that keeps inflation over the Fed’s 2 percent target. Remember: it is based on a survey, and the one thing every homeowner knows is that the housing market remains very tight indeed.
FactSet Earnings Insight report: https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_121021A.pdf