S&P 500 Will Cross 6000 In 2024, Per Sharma Disposable Income Formula (NYSEARCA:SPY) (2024)

US economy is a consumer driven economy and directly proportional to the amount of money left with middle class people from their wages after spending on basic necessities like housing, food and fuel. This disposable income fuels spending that impacts stock prices of a vast majority of companies that make up a broad stock index like S&P 500. Since 2009, I have been predicting the stock market direction based on the change in these factors, ie wages, home prices, gas prices, inflation and interest rates. Interest rates are the most important factor among these as it impacts the borrowing ability of people. A formula was created and published in 2014 at Seeking Alpha explaining the impact of these factors on the Stock Market ( 2014 Formula for Sharma Disposable Income Formula ).

Let us analyze these and other important factors for 2024:

First, about the Southern Border:

While using my formula to predict the Stock Market since 2009 on Seeking Alpha, my biggest worry has been declining population growth in the US in the last few years(chart below). Around half the states in the US have seen decline in population in the last couple of years. This could lead to a Japan like situation where consumption, housing and stock market could all go down together for decades.

While an open southern border is politically a heart burning issue for many Americans, an increase in population helps the economy in the short run.

An increase in population of around 2.5 million people every year via Texas and other states ( Homeland security website article) makes sure the consumption driven US economy continues to grow for the next few years.

Spending during the Election year:

2024 being a major election year in US (and also some other major economies), it is expected that government would spend aggressively to boost the economy. Usually, the stock market and economy grows in the election years when a sitting US president is running for re-election. The US treasury has in fact borrowed more than a trillion dollars in 2023, and I can guess some of that would be spent in 2024.

Reference: US treasury borrowing

Wages:

After many increases in the interest rates, the Federal Reserve has been able to slow down the growth in wages and is now around 5% per year from nearly 7% per year 2 years back. Now, the Fed has announced that interest rates would be reduced in 2024, the decrease in wages may not continue, and I expect wages to continue at the current pace of around 5%.

Reference: Wage Growth Tracker

CPI:

Reference: CPI info

While the inflation was growing at more than 9% per annum last year, it has now come down to 3% after the aggressive efforts of the FED. It may reach 2% target by the end of 2024. For my calculations, I will use it as 3% in my formula.

Gas Prices:

2024 being an election year, it is important for the incumbent government to ensure gas prices are affordable. While prices did go up in the middle of 2023, they have come down now to where they started from in the beginning of the year. While the OPEC has been cutting production recently, it has not been able to curtail falling prices due to production being raised by non OPEC countries. In 2024, I see the trend of gas prices to go up slightly, may be around 10 percent higher due to economic growth world over due to falling interest rates and aggressive spending by major governments before the election.

Reference: Gasbuddy website article

10 year treasury yield:

During 2023, the ten-year treasury yield grew more than 1% i.e. from 3.8% to 4.9%, but now it has come down to 3.9%. With the Fed reducing short term rates and the inflation falling down, there will be a downward pressure on the long term treasury yields. I expect the ten-year yield to fall down by around 50 basis points but not much more as the economy, inflation and wages are still growing at a healthy pace.

For the calculations, I will use two scenarios, one with no change and another where it falls down by 1%.

Reference: FRED 10 year yield article

Impact of the 10-year treasury yield on S&P 500 PE ratio:

Historically when the 10-year treasury yield used to be 5%, the equivalent PE ratio for the 10-year treasury bond is 20, whereas the S&P 500 PE ratio used to be 15 or a 25% discount due to additional risk. Now, as the ten-year yield is moving towards 3% which is a PE ratio of 33, the S&P 500 yield at a 25% discount should be 24 at the end of 2024.

Case Shiller for home price index:

reference: S&P/Case-Shiller U.S. National Home Price Index

Home prices had started falling down in 2022 and bottomed out in first quarter of 2023 due to a threat of recession. However, as recession never happened and with 2 income families being the norm in US now, consumers are confident, and we can see increase in home prices again. Additionally, consumer is now looking for newer modern homes, which are limited in supply. I expect home prices to continue moving up may be around 5% during 2024.

Major Risks and Factors:

Population growth leads to consumption growth and thus is very important for the economy and the Stock Market. Immigration has been helping population growth in the US so far, but if populist ideas curtail immigration dramatically, it would lead to a negative impact on the economy and Stock market.

Secondly, if the wars in Ukraine and Middle East escalate and impact food and oil prices leading to much higher inflation, it would negatively impact economy and StockMarket.

Thirdly, a weak US dollar could negatively impact the stock market as it drives up inflation in the United States.

Let us now plug these #s into the Disposable Income Formula:

Conclusion:

The best case scenario is pointing to an increase in S&P 500 by more than 30% and the worst case scenario is pointing to an increase of more than 10 %, the average between the two is 21%. From the current levels of S&P 500 at 4800, the average between the best and worst is 5800, while the best case scenario takes it to above 6000.

Editor's Note: This article was submitted as part of Seeking Alpha's 2024 Market Prediction competition. If you are interested in becoming a contributor and taking part in future competitions, click here to find out more and submit your article today!

Sanjeev Sharma