The S&P 500 rose 12%, if analysts have the right components

The financial media love to get expert predictions about where they think the S&P 500 is going. Some experts look at technical analysis models, others look at valuation metrics, others apply a overall 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 to the 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 one particular expert 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 (symbol: SPY), and then we weighted the results together to determine the analyst’s implied average target for the ETF. himself. For the SPDR — S & P 500 — ETF Trust ETF, we found that the implied analyst target price for the ETF based on its underlying holdings is $ 486.88 per unit.

With SPY trading at a recent price close to $ 434.08 per unit, that means analysts are seeing a 12.16% rise for this ETF taking into account analysts’ average targets for the underlying holdings. Fox Corp (symbol: FOXA), Marathon Petroleum Corp. (ticker: MPC) and Willis Towers Watson Public Ltd Co (ticker: WLTW) are three of SPY’s underlying holdings with a notable increase over their analysts’ target prices. Although FOXA recently traded at a price of $ 37.13 / share, analysts’ average target is 16.17% higher at $ 43.13 / share. Likewise, MPC is 15.53% higher from the recent stock price of $ 57.13 if the average analyst target price of $ 66.00 / share is reached, and analysts expect on average for WLTW to hit a target price of $ 260.78 / share, or 14.98% above the recent price of $ 226.81. Below is a twelve month price history chart comparing the performance of FOXA, MPC and WLTW stocks:

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

name symbol Recent price Avg. 12-Mo analyst. Target % increase over target
SPDR— S&P 500— ETF Trust ETF TO SPY $ 434.08 $ 486.88 12.16%
Fox corp FOX $ 37.13 $ 43.13 16.17%
Marathon Petroleum Corp. MPC $ 57.13 $ 66.00 15.53%
Willis Towers Watson Public Ltd Co WLTW $ 226.81 $ 260.78 14.98%

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.


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Richard V. Johnson

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