1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 115
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
observations, whereas a forecasting error of -5%+ (i.e., the actual index value was at most 5%
below the forecasted value or above the forecasted value) encompasses 65% of observations.
Distribution of consensus forecasting errors for the S&P 500 index value one year out
105
90
# of observations
75
60
45
30
15
0
Below 20%
-20% to 15%
-15% to 10%
-10% to - -5% to 5% 5% to 10% 10% to 15%
5%
15% to
20%
Above 20%
Bloomberg Finance LP, Scotia Wealth Management | Based on monthly values going back to March 2004
The 2026-end S&P 500 forecast is underpinned by earnings growing at a healthy 13.2% pace to
$308.80/share. At the same time, the target assumes that the already elevated price to earnings
multiple expands further to 25.7x from 2025’s forecasted P/E of 24.6x. The latter already sits at
approximately the 80th percentile of its historical range going back to the year 1990, while an
implied multiple of 25.7x would sit in the mid-80s percentile, a task that is not necessarily
impossible, but is at the very least somewhat ambitious, requiring a supportive macroeconomic
and interest rate environment that leaves limited margin for error should earnings disappoint.
To illustrate this sensitivity, we stress test potential return outcomes by holding EPS growth
expectations constant under varying P/E regimes. The analysis finds that even modest multiple
compression would be enough to materially reduce the implied expected return, while further
multiple compression would fully offset earnings growth and result in negative price returns.
Return outcomes under varying P/E regimes holding 2026 EPS growth forecasts constant
20%
15%
10%
5%
0%
-5%
-10%
-15%
20X
21X
22X
23X
24X
2025 P/E
2026 P/E
Source: Bloomberg Finance LP, Scotia Wealth Management
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