Predicting S&P 500 at 6,300 - 6,500 by year end

0:09Very happy to welcome back Sanjeev Sharma to Investing Experts. Sanjeev has been a Seeking Alpha analyst, contributor for just about the same time as I've been at Seeking Alpha, almost two decades now, Sanjeev. So great to have you on. Your work speaks for you in terms of how you've been looking at the markets. Last time you were on, you were giving us your prediction about the S &P 500. What would you say about the markets these days? Rena, thanks for having me. It's good to see you again. I would say, I mean, we discussed previous year about, you know, when the market was down. If you remember last year in our last podcast, and the market was down in 2025, I said market will go up.

0:56I was hoping I can say the same thing because the market is up this year, but it does not look like that for me. And it's based on the formula or methodology that I've developed and published on Seeking Alpha, which is the disposable income-based methodology. So I look at the key factors which impact a common man's disposable income, which is the change in his wages, the change in the inflation which is a CPI number, the change in the gas prices, the change in the home prices and also the interest rates. I only look at these five factors. So if I discuss these factors with you, like if I compare these factors, you see the wages, they are not going up dramatically this year.

1:49they are going up, but they are like around 3.5 % so far, a one-year increase. But this year, for the second quarter, because of the additional tax refunds which people got, I would say it was a help for people. So if I add that amount, because people on and average got at least$1 ,000, you can say around$1000 more tax refund when they filed for taxes compared to previous year. So this has been helpful so far. So if I add the 3.5 with the tax refund which comes to around 1.5 it's around more than 5 % is the wage growth. But inflation wise you can see the inflation has been very high this year primarily due to the oil prices and that primarily due to the war in Iran.

2:45So, the inflation has been high and now we were hoping that the inflation will go down but the war has again started. So, that's a concern. Basically, the CPI numbers are around 3.5 % higher this year. And the next one is the gas prices. You always look at the gas prices in the initial four months because the first four months of gas prices impact, you know, a large part of the rest of the year. Because if, let's say, the prices are high, oil prices are high, or the gas prices are high, in the first four months, the impact of it is going to create inflationary or deflationary impact, not just in the first four months, but much later.

3:31Because it is used in transportation and so many energy, you know, requirements. So, if you look at the gas prices, there, you know, when the year started, average gas at the pump was around$2.7 per gallon. And when the war was at peak, it was more than$4, you know, in fact, for some places, $4.50. If you are in California, then easily more than$6, right? So, the gas prices have been phenomenally high, maybe 40 to 50 % high in the first four months. That's bad. I mean, that's not helping. And then interest rates, because the 10-year yield is looking at the inflation, so the interest rates have also not gone down this year.

4:27So, if you look at the 10-year yield, it started from around 4.1 or 4.15 like around that in the beginning of the year and if you look at now the 10 year yield is around 4.6 so almost 40 basis points the yield is up so that's not helping also now the home prices I was expecting at least the home prices will go down and it looks like the home prices are going down when I look at homes when I search online to try to find a home I see that people have started reducing the price of the homes it's not easy to find buyers especially because immigration is low immigration is not the same as it used to be a few years back and a lot of people who are working here on temporary visas they are because of the policies they are not necessarily very you know confident that they will get their permanent residence or they will become citizens later in after a few years.

5:37So they are also a little bit worried and they are not investing money in the housing market plus low immigration and the population is not growing much. So that's also impacting the home prices. So when I look at all those sectors I think the market is not going to go up dramatically this year even though the market is high this year so far but by the end of the year when i put all of these things into my formula and the only you know saving grace used to be the static factor because the static factor was 20 but last year we saw and i'm reduced the static factor now to around you know 9.5 or 9 around that much because i don't think the static factor is you know you You may be wondering what is the static factor essentially.

6:27What the static factor does is, it says, let us say there is no change in any of these factors, any of these five factors. Let's say there is no change in wages. Let's say there is no change in inflation. Let's say there is no change in gas prices. Let's say there is no change in home prices. Let's say there is no change in interest rates. What will the stock market do? Right? So basically, the static factor says, traditionally, if everything else was no change, still the stock market will go up by 20%. And the reason for that is, which is my theory or my assumption is that number one, population increases.

7:09So the demand for goods and services increases. So with the same, you know, setup of infrastructure, companies are able to sell more goods. that's helping them. And secondly, with additional technology every year, companies are able to make their processes more efficient and increase the earnings. So because earnings per share is going to increase, even if all those factors are not changing, companies will make sure their earnings are going up. Primarily due to inflation, primarily due to population as well as use of technology. So this year because the population is not necessarily growing up the same way we used to see in the previous years like a few years back I think this static factor is not going to be 20 but it will be somewhere like 9 which I calculated last year, 9 or 10.

8:10So when I put all those sectors into my formula, it doesn't look like market will, by the end of the year, market will be as high as it is now. It looks to me market will be not like, some people will tell you that market will go dramatically low, right? You hear stories about there are some Parma beers who will tell you market will go 50 per cent down, 70 per cent, I don't think so. It will not go dramatically low. What my formula tells me, it will go slightly lower than where we started. It will go maybe 3 % to 5 % below where it started, where we started. That means it started at around 6 ,800, 6 ,800 something, right?

8:51So it will be around, market will be 6 ,500, 6 ,300. That's what my numbers are telling me for S &P 500 for 2026. In terms of, you know, you discuss factors that you weren't expecting. in terms of how the rest of the year plays out if unexpected things continue to happen, increasingly happen, is your model predicated around solving for even those surprises? Or would something like a Black Swan type of event, even though I'm not sure what the Black Swan events would be at this point, but what kind of headline-driven news might affect the number in terms of what the market might hit by year's end?

9:39Yes. So this model is not able to, you know, consider black swan events. It is only based on the average man's consumption power, basically how much the average man in America can consume based on all these factors after paying for the basic necessities of life, like home, like gas, right? Like food. Basic necessities once he does, once he's able to spend, what is the remaining dollars he has in his pocket? Based on that, I am, you know, I've created this formula and methodology. So far it has been working fine for almost 20 years, you can see. And I'm happy for that. But there is, yes, there could be Black Swan events, which I cannot predict what are those.

10:27But so far it has worked. I mean, there could be many things which can happen. You know, the war is definitely something which we are all worried about. And what would you say about the tech sector? I know you have thoughts on the LLMs when we're talking about AI. What would you say to investors looking at that space or what would you say in general about the tech sector? yeah so there is a lot of excitement about you know the large language model like anthropic open ai and so many of you know xai so many of these and it is illogical because these these look very promising and whoever has used these are very impressed right and but what let me tell you if you go back if you go back you know 30 years we had the same type of excitement when the dot-coms came, when people saw they could send emails, you know, in a few seconds without paying anything, they could connect to somebody in the opposite side of the world without doing anything or paying anything.

11:33So all that was also equally exciting or probably more exciting. But what happened at the end of 1990, the beginning of 2000, you know, the dot-com bubble burst. As for the large language model, I would say that we have been using neural networks for a long time. But the key to this, you know, large language model was a paper written in 2017 by Google Brain. And it was, the name of the paper was Attention is All You Need. And based on that paper, you know, next year, in 2018, you had two transformer models. They're called transfer learning or transformer models. which came up. One was the BERT and the other was the GPT.

12:18And now those same models, proprietary models, around 20 of those proprietary models are available. Around 500 of those open source models are also available. And then the derivation of these open source models, using specific data set or trying to solve specific problem, you have models, around 700 ,000 models further available, which are, you know, based on solving a specific industry or problem or, you know, basically training the data on, training the model on a specific set of data. So, you can see the amount of choice people have now. That means 500 open source, 20, you know, proprietary models, plus 700 ,000, you know, basically derived work.

13:09So, if you look at this kind of a huge choice the problem is that why should the consumers pay a high amount or what is I would say looking at the top companies like Anthropic or OpenAI or XAI I mean how will these companies maintain pricing power when there is so much choice the consumer or the client has that is what worries me and because of that I won't say it worries me but that is what is going to impact the image of all these companies because if the company doesn't have pricing power, there is no solid moat around any company. Yes, some companies are definitely more advanced right now compared to others like Anthropic is definitely quite good compared to some of its competitors but others will try to catch up and will catch up probably at some point even if they don't catch up.

14:05The question is when the pricing difference is there, many consumers might not choose entropic and could go with something much cheaper or free. So that is one concern that all this, you know, AI is great, but will the AI companies make money? That is doubtful, especially because the marginal cost is high. When somebody sends a new request to an AI company, the marginal cost to derive an output is not free. It's like it requires power, requires some computation. And then unless you can make enough money for that, you may not be able to basically remain profitable. I'm very impressed by these semiconductor companies.

14:51And in fact, this year I have invested in semiconductor companies. But mostly, I have a large amount of cash this year. Because of this same reason, because my formula doesn't tell me the market will go up, though the market has been going up right now. I mean, if you see the S &P 500 is around 10 % up for the year, but S &P 500 without the technology companies, only around 5 % up this year. So because of this, I feel once investors realize, once this message goes deeper to average investors also, So besides the seasoned investors, that profitability for these companies is difficult. The market could react and the prices could fall.

15:36Thank you for those thoughts. I have some follow-up questions, but I'm interested if you could remind our audience what your background is in. I think that would be helpful also in understanding kind of your thoughts and strategies here. Yes, basically, I have an MBA from Columbia Business School. I've done many different type of works. I've taught business innovation and finance in business schools. I've been doing consulting in different banks for regulatory projects. Plus, I'm a contributing analyst at Seeking Alpha, as you know, for almost 20 years. I appreciate that. In terms of the dot-com and drawing parallels between what's happening now and a lot of parallels drawn, I understand the reasoning.

16:20I think a lot of people understand the reasoning behind drawing those parallels. some of the answer to that some some people would say some people would counter that there were winners to be had from the dot-com bust from the dot-com era that there are winners to be found a would you agree that there are winners to be found it's just very difficult to do that and the winners that seem like they're going to be winners may not be the long-term winners a and b what would you well let's leave it there would you agree with that statement first Yes, there will definitely be some winners. One of them, for example, Anthropic, I can see right now is much better compared to competitors, especially for coding area.

17:04You can build an entire product by just no coding required for that. So I see, I am very impressed by Anthropic, the cloud, basically. so it is I think some of these will definitely be winners but the fact is if there is so much competition and the prices go down market will go down when the market goes down everybody goes down it's not that one company will keep standing when the entire market goes down when market goes down even the best companies go down and then after the shakeout you can see that you know some you will see that some companies will emerge as winners or stronger other will just be vanishing.

17:48Many companies will vanish. And it can take a long time, you know, for the winner to emerge. If I had somebody like Steve Kress on the show, he would say that he's a big fan of buying the dip, that investors should be buying the dip. What would you say about that? I guess also, would you call your approach in terms of being very cash heavy right now, would you call that approach a conservative approach? Yeah, I'm very conservative this year because I don't know why it's going up. Even if it is going up, I have a feeling it will go down. So I'm very conservative this year. And yes, when the dip happens, I'll be interested to buy.

18:26Like for example, SpaceX. SpaceX, you can see how much it went up and where it is right now. The stock went up dramatically after the IPO and now it's dramatically down from that. And I feel it's just the beginning. It will continue to go down at least for a few more months. And then, yeah, there may be an opportunity to buy at that time, I would say. And I'm guessing you're not surprised by that decline in SpaceX. I'm sensing that you saw that coming. No, no, I was expecting it. I was expecting, no, it was totally expected, yeah. My other question would be, we've been having this conversation a bit on the podcast about this AI value chain and how there are maybe not even a player as obvious as Anthropic.

19:10I was talking, I believe it was with Clem Chambers last week, and he was talking about Goldman Sachs is an interesting AI play at this point, because who's going to be funding this business going forward is somebody like Goldman Sachs. What would you and then there's also people that talk about different parts of the AI value chain, you know, in terms of what's coming, not necessarily what's happening right now. What would you say in terms of speaking to the the AI value chain and what may be coming or what stocks or sectors may be more promising than others? Yeah. So I did some analysis on some of these companies, for example, you know, Google, Microsoft.

19:50Everybody's everybody's in AI now. Right. So I looked at Google AI, NVIDIA, Micron, all of these, you know, some of these top basically companies. And I noticed that the free cash flow is basically high with these semiconductor companies. Whereas other companies like Oracle, Microsoft, Google, if you look at their cash flow, some of them have negative cash flow and some of them have very low cash flow, free cash flow. So therefore, I feel looking at it, semiconductors are best choice. If you have to invest the money in the semiconductors are best. What semiconductors do you like more than others?

20:38Are there specific names that you would mention or specific kind of areas or points of focus? Yeah, I've invested in NVIDIA, I've invested in Micron, SanDisk, Intel. So those are some of the companies I've invested. And then how do you know how to get out of them? That's a good question because right now, I think the demand is still going to be there for a few more months at least. But when the dip happens, everything will go down. So I keep thinking about getting out of them. but the fact is that I've already reduced my I've already taken out some profits so I'm not that worried because I already took some profits from them but I think I should get out of them in the next few months I think so.

21:27What's going to be like a telltale sign? It's difficult the exact time is very difficult to product because the demand for semiconductors I feel will continue and then their free cash flow is good and it doesn't matter who is the winner you will need the infrastructure you will need the GPUs you will need the memory so that's what I think but yes for example Micron if you look at the forward P Micron it's 6 so why should I be worried about a company like that even if it goes down when a forward of a year of a company is six it's damn cheap Sanjeev I've been asking people towards the end of conversations if they have a motto when it comes to investing or life do you have a motto that you live or invest by yeah mainly I think overall market because you know I used to be a value investor earlier you know only doing value investing but I realized you know when the market goes down doesn't matter whether it is welly stock or broad stock, everything goes down.

22:43So, right now, I think I'm basically a macro person looking at the macro and then deciding whether to stay invested or not. If you are sure, like last year, if you remember, we talked in, I think it was in April, we talked market was way down at that time and I said market will go up. So, I knew market will go up. So, I just bought A lot of call options, they did well for me at that time. Anything else you would say macro-wise or market-wise, anything else that you would leave investors with from this conversation? Yeah, I would say, see, everybody is focused on earnings per share. That companies are able to increase their earnings per share because they can cut down people, they can use AI, improve efficiency.

23:31But ultimately, the driver in any economy is the consumer. Right now, the consumer is in a bad shape. This, basically, the AI is nothing but, you can also call it anti-Fordism. You know, the central driver of this modern economy is basically what Henry Ford invented, which is basically the assembly line, right? what we have done is every task it doesn't matter whether it is manufacturing or it is services or it is a bank or it is any office what we have done is we have taken a task we have taken a process divided it into multiple tasks small small tasks and asked people to specialize in those tasks and we paid them well enough so anybody even if he is not the brightest person he can learn the task very well and then And then basically do that job on a regular basis, get a good salary, and then pay off his bills.

24:35That's what this modern economy is based on, right? Now, AI is basically hitting at that exact point. So, AI is nothing but anti-Fordism, right? So, I feel because of that, it is a serious risk. Everybody knows it's a serious risk. I'm not saying something new. but it has already started impacting an average consumer because their inflation is high right now and wages are not growing jobs are not growing that fast so it will definitely impact the market sometime this year or sometime early this year but i have a feeling it will be this year sanjeev thank you for your time appreciate you coming back on sharing your insights with us i I think many, I know many investors find it helpful.

25:22So thanks for taking the time. Is the best way for people to get in touch with you via Seeking Alpha? Yes, or my LinkedIn also. You will find my details and the email is also available on Seeking Alpha. Thanks a lot, Reina.

25:34Sanjeev Sharma:Just a reminder, anything you hear on this podcast should not be considered investment advice. This is for entertainment purposes only, and you should seek advice from a licensed professional before investing. If you enjoyed the episode, leave a rating or review on your favorite podcasting app. and we'll see you soon with a new episode.