How to beat S&P 500!

It is said to be difficult to achieve returns surpassing the S&P 500. Only about 12% of actively managed funds have been able to exceed the S&P 500 over a long period of 15 years or more in the past. However, it is possible to outperform the S&P 500 in the short term of one year, and this report will explore how to achieve this. How can you surpass the market average? Let's consider.

In 2024, the S&P 500 rose by 23% to close at 5881.62. It was a fortunate market where it ended with over 20% increase for the second year in a row. According to Bloomberg data, only 10 out of 44 hedge funds surpassed the return of the S&P 500. While each company has its own investment strategies, the two companies that achieved top performance are using macro strategies.

Source: Bloomberg

A macro strategy involves analyzing global economic and financial market trends, political situations in countries and regions worldwide, and trading in financial markets such as stocks, bonds, currency, commodities, and futures markets. I explain these movements on YouTube every day, providing an overall direction. It is important to choose companies that are actively growing so that stock investments do not become gambling in the long run.selecting companies that are growing profitably.is considered an important element for long-term success, to ensure that stock investments do not turn into gambling.

The median market forecast for the S&P 500 in 2025 is 6600. Compared to the closing price in 2024, there is a potential upside of 12.2%.

It may not exceed 20% for the third consecutive year, but...By aiming for a return of around 13%, it is possible to surpass the market's average return at the current point in time.may remain elevated.

Basically, stock prices are calculated by multiplying EPS (earnings per share) by PE (price-to-earnings ratio).

The EPS of S&P 500 in 2024 is around $240 per share.

Blue Line: S&P 500
Black Line: EPS 12 months later

Source: FACTSET

For the period from 2014 to 2024, there have been moments of short-term stock price declines due to changes in financial policies, quantitative easing, and tightening, but fundamentally, corporate profit growth has continued.There is an observable correlation that if EPS increases, the stock price also increases.can be seen.

EPS Forecast for 2025

Goldman Sachs: $268 (As of November 26)
FACTSET: $260-$275 (As of December 5)

Although the fourth quarter earnings for 2024 are not yet complete,Expected to be around $240.It is projected to be around 8% growth.

[Is the high PE ratio okay?]

S&P 500's PE based on EPS (Earnings Per Share) for the past yearPE is 28.7, considered overvalued.It is said.

Graph of past 10 years of PE

Green: 5-year average 24.0
Blue: 10-year average of 22.0.

Source: FACTSET

However, US stocks grow quickly.Calculating based on the future estimated EPS,which is more common. Therefore, looking at the future 12-month estimated EPS,the PE ratio drops to 22.3.down to that level.

Graph of the past 10 years' 12-month forward PE.

Green: 5-year average 19.7
Blue: 10-year average 18.1

Source: FACTSET

The current market average PE ratio of 22.3 times is still relatively high compared to the past. However,What is the correct PE ratio?There is no definitive answer to what PE ratio is ideal. The ratio of 22.3 times is higher than previous levels, but it may become the new average in the future. Just like how the 5-year average is higher than the 10-year average, it varies depending on the period considered. With the Federal Reserve's monetary easing, AI advancement, and increased productivity due to AI, if companies can enhance profits,An increase in PE ratio may be permissible.Therefore, considering stock price = EPS (earnings per share) × PE (price-to-earnings ratio) as a premise, it is stillThe growth of EPS is important.I think.

[S&P 500 EPS Growth Rate]

The average year-on-year growth rate of expected EPS for the S&P 500 since 1991 is 7.3%.
The market's expected EPS growth rate in 2024 is about 8%.

Of the top 5 companies that contributed most to revenue growth, 4 were NVIDIA, Amazon.com, Alphabet, and Meta Platforms. The fourth quarter earnings report for 2024 has not ended yet, but analysts are expecting the "Magnificent 7" to report 33% revenue growth in 2024.Andforecast a 33% revenue growth from the "Magnificent 7" in 2024. AndIt is predicted that 493 other companies will report strong revenue growth of over 4% in 2024.Source: FACTSET

Source: FACTSET

With the profit growth of 493 companies falling below the S&P 500, their stock prices are clearly trailing behind the S&P 500.

Source: Bloomberg

Source: Bloomberg

Therefore, if you aim for returns exceeding the market average in 2025, at least this

ETCInvest in stocks that exceed the EPS growth rate of the S&P 500 as a whole.It is necessary to do so. FACTSETexpects EPS growth rate of 14.8% for 2025.、and revenue growth rate of 5.8%.For example, the method of screening under the following conditions.

For example, here is how to conduct screening under the following conditions.

1. EPS growth rate over 20% for 5 years.
2. Revenue growth rate over 20% for 5 years.
3. Market Cap over 100 billion dollars.

moomoo brokerage's desktop application

→① Investment Guide
→② Screener

→③New Creation
→④Add Conditions
→⑤Market Cap & EPS Annual Growth Rate & Revenue Annual Growth Rate

→⑥Input Amounts and Percentages
→⑦Screening Results

① 'NVDA: EPS growth rate 48.4% Revenue growth rate 39.06%'The Datacenter GPU and Cuda software platform has established its position as a leading vendor of AI model training. This use case is expected to increase exponentially over the next few years.

How to confirm the evaluation by analysts

※The target price displayed on this screen is for information purposes only and not a recommendation for investment.

→① Financial Estimates
→② Analyst Evaluation

Overall Rating:BullishTarget Price:Upper Limit: $220, Average: $178, Lower Limit: $160

② 'CRM: EPS growth rate of 24.05%, revenue growth rate of 21.28%'It is a global IT company that provides cloud-based Customer Relationship Management (CRM) software.

※The target price displayed on this screen is for information purposes only and not a recommendation for investment.

Overall Rating:BullishTarget Price:Upper Limit: $450 Average: $402 Lower Limit: $286

③ 'ANET: EPS growth rate 45.33% Revenue growth rate 22.19%'It is a network equipment manufacturer for large data centers and cloud computing environments.

※The target price displayed on this screen is for information purposes only and not a recommendation for investment.

Overall Rating:BullishTarget Price:Upper Limit: $140, Average: $119, Lower Limit: $95

Sector that exceeds S&P 500's EPS growth rate

In 2024, the contribution of the profit growth of the Magnificent Seven was too high, and while this trend is expected to continue in 2025, the base is gradually widening.

High growth rates are expected in specific sectors.

– Information Technology
– Health Care
– Industry

Especially Information Technology and IndustryUpward revision from the expected on September 30thTo outperform the market average, a certain level of concentrated investment is necessary, so instead of buying all sectors with higher growth than the S&P 500, it is common to focus on investing in genres that one is proficient in within this domain.

[Summary]

It is said to be difficult to achieve returns higher than the S&P 500. In 2024, it rose by 23%, but most of this increase was due to the profit growth of a few major companies like Magnificent 7, while the growth of other companies was low. Assuming a solid foundation in the macro environment, we believe that it is possible to exceed the market average return in 2025 by concentrating investments in stocks with high growth expectations.

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