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This is the forecast of the S&P 500 Index for the 1Q 2022. It is based on the linear regression model where I use the Gross Domestic Product (GDP) to predict the value of the S&P 500 Index. This forecast is trying to predict a general pattern, direction, of the stock market in the near future. When the forecast calls for a negative return, it is a warning sign. It means that the S&P 500 Index maybe expensive and equity investors should be extra cautious in the near term. On the other hand, when the forecast calls for a positive return, it means that the S&P500 Index maybe trading at favorable price level.
Based on the regression results, the S&P 500 index is valued at 4,513 level for the 1st quarter 2022. On February 4, 2022, the actual S&P 500 index closed at 4,500. If the model is correct, the potential near term upside is only 13 points or 0.29%. The current S&P 500 index looks fairly priced. Another way to interpret the forecast results is to think of today’s S&P 500 index level as having limited upside potential near term. Equity investors may not be compensated for taking equity risk near term.
This prognosis is based on the expected Gross Domestic Product (GDP) of the United States in nominal terms, current USD terms. I use the GDP to explain the value of the S&P 500 Index. I use the last 10 years of quarterly data for both the S&P 500 Index and the GDP to run a linear regression model. I intentionally limit the number of observations to the most recent 10 years. It enables me to focus on the appropriate current structure of the economy. The model continues to change and reflects ever-changing economic structure.
For me to forecast the S&P 500 index for the 1st quarter 2022 I have to calculate an estimated GDP for the 1st quarter 2022 as well. According to the economic projections of the Federal Reserve Bank Board Members and Federal Reserve Bank Presidents released on December 15th, 2021, the real GDP is expected to increase between 3.2% and 4.6%, and Personal Consumption Expenditure is expected to increase between 2.0% and 3.2% for the year 2022. As a result, the nominal GDP is estimated to rise between 5.2% and 7.8%. Next, I divide the annual expected GDP growth by 4 to calculate the 1Q 2022 GDP number.
By multiplying the current dollar GDP for 2021 by the expected nominal change for the 1st quarter 2022, I calculate the GDP for the 1st quarter 2022 to be between $24,304.26 and $24,460.21 billion. Next, I can forecast where the S&P 500 Index will close at the end of the 1st quarter 2022. I am using the Excel spreadsheet to run a linear regression model where the S&P 500 is a dependent variable, and GDP is the independent variable. Based on the last 10 years of quarterly data, I forecast the S&P 500 Index to close between 4,483 and 4,543 at the end of the 1st quarter 2022 (see Table 1). The midpoint for the S&P 500 index is forecasted to be at 4,513 during the 1st quarter 2022.
Summary statistics shows that the GDP can explain 90% of the performance in the S&P 500 Index (see Table 2). Overall regression model looks appropriate to be used in the S&P500 forecast since the Significance F is very small near 0. This means there is a very small chance that the results are based on a random luck. Also, the P-values of the intercept and the independent variable – GDP are very small, near 0. This means that the GDP is statistically significant in explaining the performance of the S&P 500 Index. Also, the best fit line shows how close the predicted values are to the actual S&P500 index (see Chart 1).
The S&P 500 index forecast for the first quarter 2022 shows that the index maybe fairly priced with just 0.29% upside remaining from the February 5th close price. The value of the S&P 500 index is projected to be at 4,513 at the end of the 1st quarter 2022. The S&P 500 index appears to be fairly priced. Equity investors who purchase the S&P500 index may not be compensated for the risk taken in the near term. This model can be used as one of the tools to help measure how expensive or discounted the stock market is near term. As with all forecast models, it is not perfect and may not always provide the correct forecast. This forecast should not be the only evaluation tool used. Instead, it should be one of many diagnostic tools in the evaluation toolbox of investors.
The Federal Reserve Bank, retrieved on February 5th, 2022
U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, February 5, 2022.
Yahoo! Finance, S&P 500 index data, retrieved from https://finance.yahoo.com/, February 5, 2022.
The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor, before making an investment decision. Neither ECNFIN.COM nor its author are responsible for any damages or losses arising from any use of this information. Past performance doesn’t guarantee future results.
ECNFIN.com and its podcast are not associated with nor do they necessarily represent the opinion or advice of Epiqwest Culver Wealth Advisors LLC.
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