Crypto scare ‘not an enduring catalyst,’ expert says

Key Concepts

• S&P 500 Target: 7700 by the end of 2026.
• Projected Annual Growth: 16% for the S&P 500.
• Economic Stimulus Drivers: Deregulation, tax credits (childcare, SALT deductions), increased defense spending, tax-free tips and overtime.
• Corporate Earnings Growth: Expected to be at least 10%.
• Market Multiple: Normal market multiples applied to earnings growth.
• Historical Market Performance: 20% growth in the year before last, 20% last year, projected 10-15% this coming year.
• '90s Market Comparison: Acknowledged as potentially scary, but current earnings power is superior.
• NVIDIA Valuation: Lower forward multiple than Costco and Walmart, indicating earnings are driving stock prices.
• Crypto Market Impact: Leverage-driven new entrants causing market jitters during drawdowns.
• Bitcoin Drawdown: 30% from highs.
• Forced Selling: Leveraged crypto investors selling high-quality stocks during drawdowns.

Market Outlook and S&P 500 Target

Jason Katz presents a bullish outlook for the market, setting a target for the S&P 500 at 7700 by the end of 2026. This represents an approximate 1100-point increase, or a 16% annual growth rate. While acknowledging this may seem "outlandish" compared to recent years' performance (20% growth in the year before last and 20% last year), Katz argues it is achievable. He projects a potential 10-15% growth for the coming year, indicating a sustained and dramatic rally.

Drivers of Economic Stimulation and Market Growth

Katz identifies several key factors contributing to this optimistic forecast:

• Deregulation: While often discussed, its stimulative impact is significant.
• The "Beautiful Bill" (Implied Legislation): This legislation is highlighted as a major stimulative force. Specific provisions mentioned include:
  • Tax Credits for Childcare: Directly benefits consumers.
  • Increased Deductions on SALT (State and Local Taxes): Provides tax relief to individuals.
  • Increased Defense Spending: Stimulates economic activity.
  • No Tax on Tips and Overtime: Represents "real money" that translates directly into consumer spending, which constitutes two-thirds of the economy.

Corporate Earnings and Market Multiples

The projected growth in corporate earnings is a cornerstone of Katz's argument. He anticipates corporate earnings to grow by at least 10%. When a "normal market multiple" is applied to this earnings growth, Katz believes the S&P 500 valuation will be higher. He emphasizes that the current market is being driven by earnings, not just speculation.

Historical Context and Current Valuation

Katz draws a comparison to the market performance between 1995 and 2000, acknowledging it as a potentially "scary" period. However, he asserts that the current environment is different due to "mind-blowing" earnings power. He points to NVIDIA as an example, stating that its forward multiple is lower than that of Costco and Walmart, indicating that stock prices are being supported by actual earnings growth.

Impact of Crypto Market Volatility

The recent slide in the cryptocurrency market is identified as a negative factor that has made the stock market "jittery." Katz explains that new entrants into the crypto universe often use leverage to invest. When Bitcoin experiences a significant drawdown (e.g., 30% from its highs), these leveraged investors are forced to sell their holdings. The culprit for market jitters last week was these new entrants, who had to sell "high-quality performing stocks" to cover their leveraged crypto positions. However, Katz notes that not all crypto owners are leveraged, mitigating the overall impact.