CAPITAL IDEAS: Wall Street analysts remain bullish and what you need to know about inherited IRAs

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The S&P 500 hit a record high of 5,254 points on March 28, 2024. Individual investors were, expectedly, bullish. The American Association of Individual Investors Sentiment Survey topped 50 percent bulls with only 22.4 percent bears at the time. (Bullish sentiment has since drifted down to 38.5 percent, close to its historical average of 37.5 percent.)

Chart courtesy of the American Association of Individual Investors.

Professional investors also felt the good vibes. Around that time, many Wall Street firms upped their year-end price targets for the S&P 500. Some of those estimates were as high as 5,500 points. The bad news is that, since then, the S&P 500 stock-market index has gone sideways to nowhere.

Ironically, the good news is that the index has gone sideways to nowhere. Following a massive rally from its October 2023 lows, the index has avoided bubble territory by digesting some of its gains. Throughout those two months, corporate earnings of the companies comprising the S&P 500 index have been strong enough to keep the market afloat—for now.

For the first quarter of 2024 (Q1 2024), about 80 percent of S&P 500 companies have reported earnings. Seventy-seven percent of those companies reported a positive earnings per share (EPS) surprise, and 61 percent reported a positive revenue surprise. The year-over-year EPS growth rate for Q1 2024 is five percent (blending actual results with expected results). That five percent-year-over-year growth rate will be the highest since the 5.8 percent rate achieved in Q2 2022.

According to Crestmont Research, the typical annual growth rate for EPS is generally between five and eight percent. However, a five percent EPS growth rate is welcomed news after three quarters of declines in 2023 (Q1 to Q3).

Although the market has avoided bubble territory, it is still not cheap. The trailing 12-month price-to-earnings (P/E) ratio for the S&P 500 is 19.9. This P/E ratio is above its five-year average of 19.1 and the 10-year average of 17.8. At a 5 percent EPS growth rate, the S&P 500 would have to go sideways for another two-and-a-half years to bring its valuation back down to its 10-year average. If the EPS growth rate hummed along at the high end of its historical range (eight percent), it would still take about a year-and-a-half for the index’s valuation to cool off to its 10-year average.

Despite high valuations, I don’t rule out the S&P 500 hitting 5,500 points by year-end, which is the high side of Wall Street estimates. Getting to that level in a hurry might trigger further price consolidation throughout 2025—which is, again, bad news and good news. The bad news is that a long sideways stretch is frustrating when cash pays investors five percent. The good news is that the S&P 500 has an excellent track record of being a profitable investment over almost every two-year period. Consider the chart and data below from DataTrek.

Chart courtesy of DataTrek.

Going back to 1973, the average two-year rolling return of the S&P 500 is 18.2 percent (or 8.7 percent annually). As DataTrek points out in the chart, there have only been three excruciating two-year periods, each triggered by massive shocks (oil-supply issues, the Dot Com Bubble, and the financial crisis).

I would be frustrated with treading water in stocks for much of 2025, but I would not be in a hurry to sell my equity positions. Getting out of stocks would trigger tax consequences and frustrate me in another way: figuring out when to get back in.

IRS notice on RMDs for inherited IRAs

Many (hopefully most) readers of this column have financial advisors. This section of the column is for those readers to forward to their advisors so they can serve you better.

Some readers are financial advisors, and this section is to help you understand complicated tax-planning considerations.

People who inherited an individual retirement account (IRA) this year or the previous three years are now granted an additional 12 months of flexibility by the Internal Revenue Service (IRS). IRAs are subject to required minimum distributions (RMDs) when the account holder attains a certain age. The inheriting beneficiary of an IRA subject to RMDs must honor those required payments (albeit under a different set of rules).

The 2019 SECURE Act killed the “stretch” strategy, which allowed IRA inheritors to take RMDs over a lifetime. The act required the distributions to occur each year (kind of—more on that in a moment), whether or not the deceased attained the age at which RMDs began.

This portion of the SECURE Act was a mess. Many advisors interpreted amendments of the act to supersede the necessity for distributions within the initial nine-year period (i.e., the amendments made it seem as if all of the RMDs could be taken in year 10). In reaction, the IRS published notices saying, essentially, “Um, we’re not sure … we think it’s mandatory to take out distributions each year. But I tell you what: Don’t worry about it for now, through 2024, and if it turns out we’re right, we probably won’t assess you for any late fees.” So far, the IRS has not assessed any such late withdrawal penalties. (If you are a financial advisor reading this, Kaplan explains that much more professionally than I tried to.)

In IRS Notice 2024-35, the IRS extended that same concept through 2025. If you are the non-spouse beneficiary of an IRA who inherited the account on or after January 1, 2020, you get one more year of reprieve.

Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at Adviser is not licensed to provide and does not provide legal, tax, or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.