Predicting S&P 500 At 6,300 – 6,500 By Year End (undefined:SP500)

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Sanjeev Sharma explains his S&P 500 prediction for 2026 (0:35) LLMs, AI effects, and semi stocks (10:40)

Transcript

Rena Sherbill: Very 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&P500 (SP500). What would you say about the markets these days?

Sanjeev Sharma: Rena, thanks for having me. It’s good to see you again. I would say, mean, we discussed last year about when the market was down. If you remember last year, in our last podcast, when the market was down in 2025, I said the market will go up.

I was hoping I can say the same thing because 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 have developed and published on Seeking Alpha, which is the disposable income based methodology.

I look at the key factors which impact the common man’s disposable income, which is the change in his wages, the change in his in change in the inflation, which is the 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. They are going up, but they are like around 3.5 % so far, one year increase.

But this year, for the second quarter, because of the tax additional tax refunds which people got I would say it was a help for people so if I add that amount because people on an average got at least around a thousand dollars more in 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, can see the inflation has been very high this year, primarily due to the oil prices and primarily due to the war in Iran.

So, the inflation has been high and now we were hoping that the inflation will go down, but the war has again started and so that’s concern. Basically, the CPI numbers are around 3.5 % higher this year.

And the next one is the gas prices. I always look at the gas prices in the initial four months because the first four months of gas prices impact 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 because it is using transportation and so many energy, the requirements are if you look at the gas prices there, when the year started, average gas at the pump was around 2.7.

It was 2.7 dollars per gallon and when the war was at peak, it was more than four dollar, in fact, for some places, four dollar 50 cents. If you are in California, then easily more than six dollars. So the gas prices have been phenomenally high, maybe 40 to 50 percent 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 far so the interest rates are also not gone down this year. So 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 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 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 confident that they will get their permanent residence or they’ll become citizens later after a few years. So they are also a little bit worried and they are not investing money in the housing market plus low immigration and low, and the population is not growing much.

That’s also impacting the home prices. So when I look at all those factors, 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 saving grace used to be the static factor because static factor was 20.

But last year we saw and I have 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 may be wondering what is the static factor essentially.

What the static factor does is it says let us say there is no change in 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? So basically the static factor says traditionally if everything else was no change, still the stock market will go up by 20 percent.

And the reason for that is, which is my theory or my assumption is that number one, population increases. So the demand for goods and services increases. So with the same set up 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 nine, which I calculated last year, nine or 10.

When I put all those factors 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% down, 70%, 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. That means it started at around 6800 something, right?

So it will be around, the market will be 6,500, 6,300. That’s what my numbers are telling me for S&P 500 (SPY) for 2026.

Rena Sherbill: 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?

Sanjeev Sharma: Yes, so this model is not able to you know consider black span 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 remaining dollars he has in his pocket.

Based on that 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 what are those? But so far it has worked. I mean there could be many things which can happen the war is definitely something which we are all worried about.

Rena Sherbill: And what would you say about the tech sector? I know you have thoughts on the LLMs in terms of 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?

Sanjeev Sharma: There is a lot of excitement about the large language models like Anthropic (ANTHRO), OpenAI (OPENAI), XAI (X.AI), so many of these and it is logical because these look very promising and whoever has used these are very impressed.

And let me tell you, if you go back 30 years, we had the same type of excitement when the dot coms came. When people saw they could send emails 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.

So all that was also equally exciting or probably more exciting, but what happened in 19 at the end of 1990 or beginning of 2000, you know, the dot com bubble burst. So 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 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 there was a GPT. And 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 setters, trying to solve a specific problem, you have models around 700,000 models further available which are based on solving a specific industrial problem or 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, proprietary models plus 700,000, basically derived work.

So 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. Because of that, I won’t say it worries me, 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 other 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. And even if they don’t catch up, the question is when the pricing difference is there, many consumers might not choose Anthropic and could go with something much cheaper or free.

So that is one concern that all this 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 requires power.

It requires some computation. And then unless you can make enough money for that, you may not be able to, basically be or remain profitable. So that’s what it is.

I’m very impressed by these semiconductor companies. And 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, the formula doesn’t tell me the market will go up, though the market has been going up right now.

If you see the S&P 500 is around 10% up for the year, but the S&P 500 without the technology companies is up only around 5% up this year. So because of this, I feel once investors realize, once this message goes deeper to average investors besides the seasoned investors, that profitability for these companies is difficult. I think the market could react and the prices could fall.

Rena Sherbill: 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.

Sanjeev Sharma: I have an MBA from Columbia Business School. I have done many different types of work. I have taught business innovation and finance in business schools. I have been doing consulting in different banks for regulatory projects. Plus I am a contributing analyst at Seeking Alpha, as you know, for almost 20 years.

Rena Sherbill: In terms of the dot-com and drawing parallels between what’s happening now and a lot of parallels drawn, I understand the reasoning. I 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 that if you 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 gonna 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?

Sanjeev Sharma: Yes, there will definitely be some winners. One of them, example, Anthropic, can see right now is much better compared to competitors, especially for coding area.

It can build an entire product with no coding required for that. So I am very impressed by Anthropic, the Claude basically. I think some of these will definitely be winners.

But the fact is, if there is so much competition and the prices go down, the 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 the market goes down, even the best companies go down. And then after the shakeout, you will see that some companies will emerge as winners or stronger, other will just be vanishing.

Many companies will vanish, so that’s what it is. And it can take a long time for the winner to emerge.

Rena Sherbill: Right. I was gonna say if I had somebody like Steve Cress 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?

Sanjeev Sharma: 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. Like for example, the SpaceX (SPCX) example, 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.

Rena Sherbill: And I’m guessing you’re not surprised by that decline in SpaceX. I’m sensing that you saw that coming.

Sanjeev Sharma: I was expecting it. It was totally expected.

Rena Sherbill: 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 it maybe not even a player as obvious as Anthropic. I was talking, I believe it was with Clem Chambers last week and he was talking about Goldman Sachs (GS) 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, in terms of what’s coming, not necessarily what’s happening right now. What would you say in terms of speaking to the AI value chain and and what may be coming or what stocks or sectors may be more promising than others?

Sanjeev Sharma: I did some analysis on some of these companies, for example, Google (GOOG) (GOOGL), Microsoft (MSFT), everybody’s in AI now, right? So I looked at Google, AI, NVIDIA (NVDA), Micron (MU), some of these top companies.

And I noticed that the free cash flow is basically high with these semiconductor companies, whereas other companies like Oracle (ORCL), 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 the best choice if you have to invest the money in the semiconductors.

Rena Sherbill: What semiconductors do you like more than others? Are there specific names that you would mention or specific areas or points of focus?

Sanjeev Sharma: I have invested in Nvidia, invested in Micron, SanDisk (SNDK), Intel (INTC). So those are some of the companies I’ve invested.

Rena Sherbill: And then how do you know how to get out of them?

Sanjeev Sharma: 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 I’ve already taken out some profits so I’m not that worried because I already took some profits from them.

I think I should get out of them after some in the next few months, I think so. It’s difficult, the exact time is very difficult to predict because the demand for semiconductors, I feel, will continue and then their free cash flow is good.

It doesn’t matter who is the winner. You will need the infrastructure, will need the GPUs, you will need the memory. That’s what I think.

Yes, for example, Micron, if you look at the forward PE on Micron, it’s six. So why should I be worried about a company like that? Even if it goes down, then the forward PE of the company is six. It’s damn cheap.

Rena Sherbill: 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?

Sanjeev Sharma: I think the overall market because I used to be a value investor earlier on, only doing value investing but I realized when the market goes down it doesn’t matter whether it is a value stock or broad stock, everything goes down.

So 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, the market was way down at that time.

And I said, market will go up. I knew the market will go up. So I just bought a lot of call options. They did well for me at that time.

Rena Sherbill: I appreciate that. Anything else you would say macro-wise or market-wise, anything else that you would leave investors with from this conversation?

Sanjeev Sharma: I would say 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, right, improve efficiency.

But ultimately the driver in any economy is the consumer. Right now, the consumer is in bad shape.

The AI is nothing but you can also call it anti-Fordism. The central driver of this modern economy is basically what Henry Ford invented, which is basically the assembly line. What we have done is every task, but doesn’t matter whether it is a manufacturing or it is services or it is a bank or any office, what we have done is we have taken a task, we have taken a process, divided it into multiple tasks, small tasks and asked people to specialize in those tasks.

And we paid them well enough so that anybody, even if he’s not the brightest person, he can learn the task very well and then basically do that, do the job on a regular basis, get a good salary and then pay off his bills. That’s what this modern economy is based on.

Right now, AI is basically is hitting at that exact point. So AI is nothing but anti Fordism. So I feel because of that, 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.

Rena Sherbill: Sanjeev, thank you for your time. Appreciate you coming back on, sharing your insights with us. I know many investors find it helpful. So thanks for taking the time. Is the best way for people to get in touch with you via Seeking Alpha?

Sanjeev Sharma: Yes, or on my LinkedIn you will find my details and my email is also available on Seeking Alpha. Thanks a lot, Rena.