How far is the S&P 500 from fundamental fair value?

Investing.com -- The S&P 500 is hovering near what strategists at Sevens Report suggest could be its "fundamental fair value," the daily financial newsletter said in its Thursday report.

This view comes alongside upward adjustments in expected 2025 earnings per share (EPS) and an increase in market multiples, particularly in what the Sevens Report calls the “current-situation” and “better-if” scenarios.

For the first time, the S&P 500 better-if target has topped 6,000, with the current-situation target now within 50 points of that level.

The firm has set the November “current situation” target range for the S&P 500 between 5,817 and 6,094, with a midpoint of 5,956. This figure represents a significant upward adjustment from October's midpoint of 5,460.

Driving these new targets is an updated 2025 EPS forecast for the S&P 500, now at $277 per share, alongside a revised market multiple of 21X-22X, compared to October’s 20X. This improvement was well-supported as the S&P reached the lower bound of 5,817 for the first time just a month ago.

“Interestingly, stocks stalled and churned sideways after reaching the lower bound, oscillating on either side of the 5,800 area until the post-election breakout saw the S&P 500 lurch towards the midpoint of the current situation target at 5,956,” the report highlights.

This week, the market has shown signs of “digestive churn” around this midpoint, with the S&P briefly exceeding it before retreating. The report suggests that, should the rally resume, investors should anticipate a similar “pause” as the S&P 500 nears the upper limit of this range at 6,094—a level not yet reached in the 2024 market rise.

On the other hand, should profit-taking emerge, Sevens’s team expects 5,956 to serve as immediate support, with 5,817 providing secondary support.

In the optimistic “better-if” scenario, Sevens Report foresees a target of 6,300, spurred by a further EPS boost to $280 and a market multiple of 22.5X. This scenario would imply a record-breaking climb, approximately 5% above the current highs, potentially driven by a “runaway rally” with factors like fear of missing out (FOMO) and short squeezes.

Notably, round numbers like 6,100 and 6,150 could “become magnetic and “pin” the index for up to several days or even weeks if positioning gets heavy enough,” the report states.

For a more cautious outlook, the report’s “worse-if” scenario anticipates a target range of 4,420 to 4,680, based on a modestly higher 2025 EPS forecast of $260 and a multiple of 17X-18X.

While the index hasn’t touched this range in 2024, the lower end could become crucial if there’s a major downturn. If the S&P 500 falls below 5,186, this could trigger a “downside measured move” near 4,371, which is a full 50 points below the lower bound of the worst-if range.

Source: Investing.com