Report: Federated Investors sees S&P 500 at 2,500 in two years

The S&P 500 could hit 2,500 within the next 18 months to two years, Barron's reported on Sunday, citing its interview with Stephen Auth, chief investment officer, equities at Federated Investors.

Auth oversees a staff that runs about $50 billion in assets.

A robust U.S. economy growing at an annual rate of 3.5 percent to 4.0 percent should help the S&P 500 achieve the 2,500 milestone, about 30 percent higher than its current level of around 1,955 points.

"Market valuations depend on growth, bond rates and perceptions of risk, and all three of those are going in the direction that actually expands the price/earnings multiple," Auth said.

"At the same time, earnings are expanding, and that's a recipe for another leg up in the market."

He cited the improving trend in the labor market as well as growth in the underlying private economy, which has been growing at 3 percent over the last three years.

Auth also said he expects the energy sector to create a "manufacturing renaissance" because of lower costs.

The Federated CIO sees the S&P 500 reaching 2,100 points at the end of the year. That would be a gain of about 7.4 percent above the benchmark's closing level on Friday.

"Our view is that $120 in earnings is very likely," Auth said, referring to Federated Investors' target for S&P 500 earnings this year. "And the market multiple, considering the level of long-term inflation we see and where long-term bond yields ought to be, should be 17-1/2 times."

In terms of bond yields, he said Federated expects the benchmark U.S. 10-year Treasury note yield to hit 4.5 percent over the next three to five years, compared with the current yield of 2.3 percent. But in the near term, he expects 10-year yields to slide to 2.2 percent.

He estimated that equities are trading at a 50 percent discount to bonds.

Auth noted that there are many near-term forces keeping bond yields down and those factors are bullish for equities.

"For one thing, the Fed is very skittish about the mistake that was made in 1937 that caused basically the second Great Depression — that is, rates were tightened too soon."

In addition, Auth said Federal Reserve Chair Janet Yellen believes "there is a lot of slack in the labor force, and she doesn't want to slow this recovery down until these people come back into the workforce."