The S&P 500 rose 10%, if analysts have the right components

The financial media love to get expert predictions about where the S&P 500 Index is heading. Some experts look at technical analysis models, others look at valuation metrics, others take a holistic macro view of the economy. In this article, we present another forecasting approach that investors may find interesting. The S&P 500 is actually a collection of five hundred individual stocks, each with a specified weight applied in total. For each of these individual stocks, all of the major brokerage firms ask their top analysts to study the company in depth, then come up with a 12-month price target. By taking all of the different price targets from all of the major analysts, we can then calculate an average target for that security. In a sense, this average goal represents an effort of “wisdom of the crowds”, as so many individual spirits have contributed to the ultimate number, contrary to what a single expert in particular thinks.

But we can go a step further, by comparing the current share price to this average analyst target, to calculate the upside potential if the average target price is met, and we can do the same exercise for each component. At ETF Channel, we performed this exercise for all of the individual components of the SPDR — S&P 500 — ETF Trust ETF (ticker: SPY), and then we weighted the results together to determine the implied average analyst target for the ETF itself. same. For the SPDR — S & P 500 — ETF Trust ETF, we found that the implicit analyst target price for the ETF based on its underlying holdings is $ 514.05 per unit.

With SPY trading at a recent price close to $ 468.62 per unit, that means analysts are seeing a 9.70% rise for this ETF taking into account analysts’ average targets for the underlying holdings. Three of SPY’s underlying holdings with a notable rise over their analysts’ target prices are HCA Healthcare Inc (ticker: HCA), Johnson & Johnson (ticker: JNJ) and (ticker: CBOE). Although HCA recently traded at a price of $ 258.97 / share, the average analysts’ target is 11.23% higher at $ 288.06 / share. Likewise, JNJ is up 10.65% from the recent share price of $ 172.22 if the average analyst target price of $ 190.56 / share is reached, and analysts expect in average CBOE hitting a target price of $ 137.50 / share, which is 10.60% above the recent price of $ 124.32. Below is a 12-month price history chart comparing the performance of HCA, JNJ and CBOE stocks:

Below is a summary table of the analysts’ current target prices discussed above:

Are analysts justified in these goals, or overly optimistic about where these stocks will trade in 12 months? Do analysts have a valid rationale for their goals or are they lagging behind recent business and industry developments? A high price target relative to a stock’s price may reflect optimism about the future, but can also be a harbinger of price declines if the targets were a relic of the past. These are questions that require further research from investors.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.