The S&P 500 rose 31%, if analysts got the components right

Jhe financial media loves to get expert predictions on the direction they think the S&P 500 Index is heading. Some experts look at technical analysis patterns, some look at valuation metrics, some apply a view broad macroeconomics of the economy. In this article, we present another forecasting approach that investors might find interesting. The S&P 500 is really a collection of five hundred individual stocks, each with a specific weighting applied to the total. For each of these individual stocks, all major brokerages have their top analysts thoroughly research the company and then come up with a 12-month price target. By taking all the different price targets from all the major analysts, we can then calculate an average target for that stock. In a sense, this average goal represents a “wisdom of the crowds” effort, as so many individual minds have contributed to the ultimate number, contrary to what one particular expert thinks.

But we can go further, comparing the current stock price to this average analyst target, to calculate the upside potential if the average target price is reached, and we can do the same exercise for each component. At ETF Channel, we did this exercise for all of the individual components of the ETF (Symbol: SPY), then weighted the results together to determine the analysts’ implied average target for the ETF itself. For the ETF, we found that the analysts’ implied target price for the ETF based on its underlying holdings is $515.29 per share.

With SPY trading at a recent price close to $392.31 per unit, this means analysts see 31.35% upside potential for this ETF when looking at the average analyst targets of the underlying holdings. Charter Communications Inc (symbol: CHTR), United Airlines Holdings Inc (symbol: UAL) and Trane Technologies plc (symbol: TT). Although CHTR traded at a recent price of $469.50/share, the average analyst target is 38.25% higher at $649.09/share. Similarly, UAL is up 38.04% from the recent share price of $44.63 if the average analyst target price of $61.61/share is reached, and analysts expect average for TT to hit a target price of $179.23/share, 37.75% above the recent price of $130.11. Below is a 12 month price history chart comparing the stock performance of CHTR, UAL and TT:

Below is a table summarizing the current target prices of the analysts mentioned above:

Last name Symbol Recent Price Avg. 12-MB Analyst. Target % increase over target
ETFs TO SPY $392.31 $515.29 31.35%
Charter Communications Inc CHTR $469.50 $649.09 38.25%
United Airlines Holdings Inc. LAU $44.63 $61.61 38.04%
Trane Technologies plc TT $130.11 $179.23 37.75%

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

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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.


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