The S&P Is Going To 10K (On The Way to 5K)

Honestly, I really think we’re going to 9000 before heading to 6000, so why say 10K and 5K?

1. Round numbers make for catchier headlines!
2. In bubbles, things go up and down beyond what you might imagine

But let’s address the substance. Why make this call at all and, specifically, why now?

Why make this call when the odds are high that it will be wrong? Why not? The more specific a prediction is the less likely it is to occur, so I understand this is unlikely to play out exactly as predicted. More likely, it will be something like get to 9800 and then fall to 6700 or to 8900 and then retrace to 7500.

So I am fully aware that if there were a Kalshi market on this, you shouldn’t pay more than like 2%. But that doesn’t mean there isn’t something to learn from the thought process behind the overly specific prediction.

Also, note, I did leave myself some wiggle room that I didn’t say what year we will reach 10K or 5K! Maybe we hit 10K in 2032 and I can still claim prescience!

The Bull Case

It is clear we are living through a euphoric moment. There is no skepticism to be found. Stocks go up 30% in a day on news that in the past would have moved them 3%. Every AI vendor is judged to be a long term winner.

Nobody asks why one should pay a peak multiple for peak, cyclical earnings. Heck, nobody even thinks current earnings are cyclical or peak! This means markets will overshoot to the upside.

We haven’t even reached the Anthropic and OpenAI IPO phase of the bubble. The SpaceX IPO is going to set a floor for those and if that means OpenAI is worth $3T and Anthropic $4T, then should Nvidia only be $5T???

S&P 9000 seems fairly easy to forecast. The market will believe $400 in earnings a year from now and will put 22.5X on it (that’s a very high multiple but one we have seen in recent years).

To get to 10K, all you need to believe is a bit higher earnings ($425?) and a bit higher multiple (23.5). It’s very plausible if you think optimism will reign for the the next year or two.

The Bear Case

But trees don’t grow to the sky. At some point, there will be disappointment. We will realize we overbuilt capacity or that revenue for AI services isn’t growing as fast as hoped for.

Or maybe the data centers don’t get built as promised. Or they get built but are immediately outdated and need to be scrapped. Or some large tech company stretched its balance sheet to fund its CAPX and misses a debt payment.

The point is a lot can go wrong and, inevitably, something will. It is the nature of speculative frenzy! When it does, there will be panic because that is what happens on the back side of a frenzy.

Everyone will look to sell at once. There will be a realization that the market was overearning and a lot of flimsy accounting was boosting earnings.

What would happen in this case? Earnings estimates probably drop to $350 or even lower. At a “normal” multiple of 17X, that’s 6000. But in bear markets, multiples drop to 15X or lower. That can easily get us to 5000 or below.

In fact, given how inflated EPS is by cyclical excess, earnings in a post data center boom might drop to $325 or $300 meaning a 4500 or even 4000 S&P is possible!

In post bubble bear markets, a 50+% peak to trough decline is common so a bottom below 5000 is a very rational expectation. To stick with round numbers though, I will use 5000 as my floor.

For a sanity check for those who don’t think 5000 is possible…the market famously bottomed at 666 in early 2009. If the next big bottom is 5000 in 2027, that would be a 12% annual return (before dividends). That’s excellent!

Alternately, if you bought the S&P 10 years ago at roughly 2100, a 5000 S&P would be a 9% annualized return before dividends, which is a quite compelling worst case outcome.

So, yeah it would not be out of character at all for a bear market to result in S&P 5000…at which point everyone you know will be selling – or at least afraid to buy – and that is exactly when you should buy!

Why It Matters

Of course, the other thing you can do is sell when we get to 10K (or even 9000) to sidestep the future bear market. Unfortunately, even fewer people are willing to sell at the top than buy at the bottom.

So consider this note a mental “post it” to not let it ride at the top or be scared to buy at the bottom. You’ll have to figure out when you think it’s time to call a top or bottom but that’s easier than trying to chase the hot IPO or trendy stock of the moment and hope you aren’t the last buyer in before the smart money sells.

Disclaimer: I should be very clear that anything above is just my musings. It is not investment advice. I am not acting on it myself (meaning I am not buying more stock to chase 9000 or puts to protect against 5000). My main goal is trying to figure out when in the future is the right time to sell. If you act today because of what I wrote, then you have a bad investment process (meaning you should do more research than blindly follow someone else).