- The S&P 500 Index has risen by close to 17% into 2021.
- High company earnings have pushed the Index up, denoting increased market valuations.
- A decrease in the interest rates by the Federal Reserve may lower the index price due to low flow of funds to equities.
The Standard and Poor’s (S&P) 500 index takes in an average of 500 stocks representing big corporations in the US. It measures the country’s economic performance based on an aggregate assessment of the companies’ market values. The S&P 500 index has gained 16.79% YoY as of January 11, 2021. The index is trading at $3824.7 from a low of $2191.86 in the 52-week range analysis. Considering the global as a result of vaccine deployment, management of the pandemic, and rising interest rates will explain why investors are optimistic with this index.
The S&P price-to-earning (PE) ratio in Q2 2020 stood at 31.24 from 22.22 in Q1 2020 and 21.75 in Q2 2019. The ratio indicated that most company stocks (in the index) had increased by an average of 43.67% YoY in comparison to their earnings per share (EPS). This PE ratio peaked at its record height after the 2009 financial crisis when it rose to a high of 120. Taking the historical trend of the index, it may peak to a high of $4,500 by 2022 based on the economic recovery measures success.
Increasing profit margins in 2021 will present higher company earnings post-pandemic. Global corporations are trying to move to pre-pandemic levels while pushing for nominal growth. Additionally, companies that were negatively impacted by the weakening dollar will hope for a stronger dollar to improve sales.
The USD Dollar index traded at $90.606 from a low of 89.452 at the beginning of January 2021. Improved earnings will attract more investors into the S&P 500 companies leading to an increased flow of investment funds. Low yields in other assets such as bonds and rising sentiment in favor of equities will intensify premium stocks price. In the long-run, we foresee a rise of the S&P 500 index to a range of $4,000-$4,300 within 2021.
The S&P 500 index can still fall
On the flipside, the S&P 500 index can still fall if the US Federal Reserve goes ahead to increase interest rates. This situation will increase bond yields, such as the 10-Year Treasury Yield. Company market valuations will be decreased and earnings estimates will face headwinds in attracting investors.
Additionally, if the S&P 500 index reduces its PE ratio due to reduced earnings, the index may hit lows of $3,500. On March 23, 2020, the index hit a low of $2,237.40 as companies closed due to lockdowns and economic upheavals.
The 14-day relative strength of the index is stable at 66.388. This position shows increased buying activity among investors. The stochastic oscillator is at 66.785, offering an approving nod for buying the index at the price of $3,824.68. The 20-day simple moving average (SMA) is at 3,795.20, and the EMA is at 3,791.77. The 50-day SMA shows that the price trend finds support at the $3,751.90 mark while the 200-day SMA puts a hold at the $3,700.33 level. The EMA goes further and indicates a price support level at $3,689.52.
The technical analysis supports a strong buy position for the S&P 500 index. The price will increase with economic progress in place post-pandemic.