According to a Top Wall Street Strategist, the Dow Could Reach 60,000 and the S&P 500 Could Reach 8,000 as Earnings Surge

Last week, the Dow Jones Industrial Average reaching the 40,000 mark was a significant milestone for investors. However, Ed Yardeni, the chief investment strategist at Yardeni Research, foresees even greater gains in the future, driven by strong earnings.

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In a note to clients, Yardeni projected that the Dow could rise 50% to reach 60,000 by 2030, while the S&P 500 could climb to 8,000. The Dow closed above 40,000 for the first time on Friday. This would represent a compound annual growth rate of 7% for the Dow and 7.1% for the S&P 500.

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Yardeni explained that these targets could be achieved with a forward price/earnings (P/E) ratio of 20 and forward earnings at $400 per share, up 60% from this year’s estimated $250 per share. He believes this scenario is feasible within what he calls the "Roaring 2020s."

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His Roaring 2020s scenario assumes that S&P 500 companies will collectively achieve earnings per share (EPS) growth of at least 8.8% per year, which is the historical average rate since 1936. If nominal and real GDP growth rates surpass their post-1940s averages of 6.3% and 3.1%, respectively, EPS expansion could accelerate even further.

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Yardeni expects faster productivity growth than the historical average of 2.0% since 1951, which he believes is possible in the Roaring 2020s scenario. Increased productivity would lead to better-than-expected real GDP growth, lower unit labor costs (the underlying rate of inflation), and allow wages to rise faster than prices, ultimately boosting profit margins.

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Industry analysts share Yardeni's optimism, with consensus revenue and earnings estimates suggesting projected profit margins of 12.6% this year, rising to 13.6% and 14.4% over the next two years.

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Last December, Yardeni predicted that the S&P 500 would reach 6,000 within two years, a forecast that was notably bullish. He correctly anticipated a rally for the index last year, and his 5,400 target for the S&P 500 for 2024 is among the highest on Wall Street.

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Yardeni's outlook is based on a combination of factors including robust productivity growth, controlled inflation, and rising profit margins. If these conditions hold, the stock market could see substantial growth over the next decade, leading to significant returns for investors.

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