The bull market lives on in 2016, and it is now nearing six and a half years of age. Stock market valuations are high at about 18 times forward year earnings estimates for the S&P 500 Index. So how is it that the market keeps going higher and higher? It turns out that there is underlying bid as investors have literally bought every sell-off. Also, right at half of the S&P 500 Index members are yielding 2% or more (versus a yield of 1.51% for the 10-year and 2.23% for the 30-year Treasuries).
24/7 Wall St. has seen that the Dow Jones Industrial Average (DJIA) recently hit a new high of 18,622. The reality is that the Dow could hit 20,000 in 2017, within reason, and perhaps rather easily in 2018 if the wheels do not come off the economic cart. The Dow is still the largest index used for quoting “the stock market” by the public.
Before thinking that 20,000 is elusive or just too grand, just remember that many stunt pilots felt that the sound barrier was impossible to break. Now consider that DJIA 20,000 would be only 8.1% higher than the most recent close and would be only 7.4% higher than the recent all-time high.
What makes the Dow unique versus other major stock market averages (Russell, S&P indexes, and Nasdaq) is that the Dow is price-weighted based on a stock’s price. Almost all other indexes have a market cap-weighting or a modified market cap-weighting. According to IndexArb, just 10 (11 for a tie) of the Dow’s 30 stocks make up about 55% of the total Dow’s weighting.
24/7 Wall St. has identified that it would take the performance of just seven of these 30 Dow stocks to get the index to 20,000. They might lead it there alone, or they may create a halo-effect around peers that could even more easily do the job. To get an upside of an upside, please understand that this is bull market analysis. It is also so long since selling pressure and volatility (the VIX) is so low that we probably are due for a sell-off before DJIA 20,000 could be reality.
We took three points into consideration here for a three-way bull market upside to DJIA 20,000. We evaluated the highest analyst price target from reputable brokerage firms. Then we looked at the consensus analyst price target tracked by Thomson Reuters. Finally we looked at the 52-week high. By taking the mean (average) of these three points, we created upside implied price targets. Generally these were higher than the consensus.
If this seems aggressive, you have to consider that we are in a bull market and that is still short of the most optimistic analysts. The long and short of the matter is that these stocks have to keep rallying if the Dow wants to hit 20,000. The average implied bear market upside targets of these seven Dow stocks is almost 16%.
Here are the seven stocks that could likely make DJIA 20,000 a reality in 2017 or 2018.
So far, Apple Inc. (NASDAQ: AAPL) has failed to live up to expectations laid out in our bullish and bearish outlook for 2016. The good news is that its shares are back up to $108.00. Apple is tied with United Tech as the 10th largest Dow weighting at 4% of the index. Its 52-week high is $123.82, and its consensus analyst price target is $124.06 — the highest current price target is from FBR Capital and is still up at $185.00.