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Is the S&P 500 Fairly Valued? A Q1 2025 Forecast Based on GDP Regression will Try to Answer this Question.
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As of April 7, 2025, the S&P 500 Index has experienced a sharp selloff, dropping nearly 10% over the past week. This sudden decline has led many investors to wonder whether the market is now trading at a more reasonable level or if further caution is warranted. To answer this, I’ve used a GDP-based linear regression model to estimate where the S&P 500 should be trading for the first quarter of 2025. The idea is to determine whether the current valuation of the index aligns with broader economic fundamentals, particularly nominal Gross Domestic Product (GDP), which serves as a proxy for the overall size and health of the U.S. economy.
Using GDP to explain the value of the S&P 500 is both logical and statistically significant. For this analysis, I built two linear regression models: one using the past ten years of quarterly GDP and S&P 500 data, and another using twenty years. This dual approach helps account for both shorter-term trends and longer-term structural changes in the economy—particularly relevant in today’s environment where U.S. policy has become more focused on domestic growth and protectionist measures.
To run these models, I first needed to estimate nominal GDP for Q1 2025. According to the Federal Reserve’s most recent economic projections, real GDP for the full year is expected to increase between 1.0% and 2.4%, while the Personal Consumption Expenditures (PCE) index is expected to rise between 2.5% and 3.4%. This implies nominal GDP growth in the range of 3.5% to 5.8%. By dividing the annual expected GDP growth by four, I derived a reasonable quarterly figure for use in the model.
Using the most recent ten years of data, the model forecasts the S&P 500 Index to close between 5,080 and 5,124 by the end of Q1 2025, with a midpoint around 5,102 (see Table 1). This represents a modest potential return of 0.79% from current levels. Statistically, the model holds up well: the R-squared value is 0.87, indicating that GDP explains 87% of the variation in the S&P 500 over this period (see Table 2). The Significance F is very small, near zero. It means there is a very small chance that the results are based on random luck. Also, the P-value of the intercept and the independent variable (GDP) is very small, near zero. This means that the GDP is statistically significant in explaining the performance of the S&P 500 Index.
(Table 1, The most recent ten years of quarterly data for the S&P 500 Index and nominal GDP used in the linear regression model).
(Table 2 Summary statistics)
When I extended the model to include the past twenty years of data, the results were very similar and confirmed the fully valued S&P500 index at this level. The forecast from this version predicts a return of -0.37% for the S&P 500, implying the index may be trading just above its fair value (see Table 3). Interestingly, this longer-term model is even stronger statistically, with an R-squared value of 0.93 – meaning it explains 93% of the variation in the S&P 500 index over the past two decades (see Table 4). Although this model suggests a small downside, both versions tell a consistent story: the S&P 500 is currently priced close to its fundamental value based on expected GDP.
(Table 3, The most recent twenty years of quarterly data for the S&P 500 Index and nominal GDP used in the linear regression model).
(Table 4 Summary statistics)
Given these findings, the market does not appear undervalued – even after its recent pullback. In fact, the decline simply brought it back in line with where it should be, considering the current size of the U.S. economy. With such limited upside, tactical investors might want to consider safer alternatives in the short term. For example, short-term Treasury ETFs like Vanguard’s VGSH and iShares’ SHV offer appealing yields of approximately 4.00% and 4.22%, respectively. SHV provides a very low duration and minimal interest rate risk, making it an ultra-conservative cash alternative. VGSH carries a slightly longer duration, which could prove beneficial if the economy weakens and the Federal Reserve cuts rates more aggressively than expected.
Ultimately, while the S&P 500’s recent dip may appear alarming at first glance, this regression-based analysis shows that it now trades roughly where it should – neither cheap nor overly expensive. This type of model isn’t meant to be a crystal ball, but rather one tool among many to help gauge whether market valuations make sense relative to economic fundamentals. As of now, it suggests investors should remain cautious, especially in the near term. The market may not be poised for another leg down, but it also may not offer much reward for the risk being taken.
Data:
The Federal Reserve Bank, retrieved on April 7, 2025:
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20250319.pdf
U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, April 7, 2025.
Yahoo! Finance, S&P 500 index data, retrieved from https://finance.yahoo.com/, April 7, 2025.
Disclosures:
The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author is responsible for any damages or losses arising from any use of this information. Past performance doesn’t guarantee future results.
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By Ivan Sichkar, CFA, FRM, CFP®
5
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As of April 7, 2025, the S&P 500 Index has experienced a sharp selloff, dropping nearly 10% over the past week. This sudden decline has led many investors to wonder whether the market is now trading at a more reasonable level or if further caution is warranted. To answer this, I’ve used a GDP-based linear regression model to estimate where the S&P 500 should be trading for the first quarter of 2025. The idea is to determine whether the current valuation of the index aligns with broader economic fundamentals, particularly nominal Gross Domestic Product (GDP), which serves as a proxy for the overall size and health of the U.S. economy.
Using GDP to explain the value of the S&P 500 is both logical and statistically significant. For this analysis, I built two linear regression models: one using the past ten years of quarterly GDP and S&P 500 data, and another using twenty years. This dual approach helps account for both shorter-term trends and longer-term structural changes in the economy—particularly relevant in today’s environment where U.S. policy has become more focused on domestic growth and protectionist measures.
To run these models, I first needed to estimate nominal GDP for Q1 2025. According to the Federal Reserve’s most recent economic projections, real GDP for the full year is expected to increase between 1.0% and 2.4%, while the Personal Consumption Expenditures (PCE) index is expected to rise between 2.5% and 3.4%. This implies nominal GDP growth in the range of 3.5% to 5.8%. By dividing the annual expected GDP growth by four, I derived a reasonable quarterly figure for use in the model.
Using the most recent ten years of data, the model forecasts the S&P 500 Index to close between 5,080 and 5,124 by the end of Q1 2025, with a midpoint around 5,102 (see Table 1). This represents a modest potential return of 0.79% from current levels. Statistically, the model holds up well: the R-squared value is 0.87, indicating that GDP explains 87% of the variation in the S&P 500 over this period (see Table 2). The Significance F is very small, near zero. It means there is a very small chance that the results are based on random luck. Also, the P-value of the intercept and the independent variable (GDP) is very small, near zero. This means that the GDP is statistically significant in explaining the performance of the S&P 500 Index.
(Table 1, The most recent ten years of quarterly data for the S&P 500 Index and nominal GDP used in the linear regression model).
(Table 2 Summary statistics)
When I extended the model to include the past twenty years of data, the results were very similar and confirmed the fully valued S&P500 index at this level. The forecast from this version predicts a return of -0.37% for the S&P 500, implying the index may be trading just above its fair value (see Table 3). Interestingly, this longer-term model is even stronger statistically, with an R-squared value of 0.93 – meaning it explains 93% of the variation in the S&P 500 index over the past two decades (see Table 4). Although this model suggests a small downside, both versions tell a consistent story: the S&P 500 is currently priced close to its fundamental value based on expected GDP.
(Table 3, The most recent twenty years of quarterly data for the S&P 500 Index and nominal GDP used in the linear regression model).
(Table 4 Summary statistics)
Given these findings, the market does not appear undervalued – even after its recent pullback. In fact, the decline simply brought it back in line with where it should be, considering the current size of the U.S. economy. With such limited upside, tactical investors might want to consider safer alternatives in the short term. For example, short-term Treasury ETFs like Vanguard’s VGSH and iShares’ SHV offer appealing yields of approximately 4.00% and 4.22%, respectively. SHV provides a very low duration and minimal interest rate risk, making it an ultra-conservative cash alternative. VGSH carries a slightly longer duration, which could prove beneficial if the economy weakens and the Federal Reserve cuts rates more aggressively than expected.
Ultimately, while the S&P 500’s recent dip may appear alarming at first glance, this regression-based analysis shows that it now trades roughly where it should – neither cheap nor overly expensive. This type of model isn’t meant to be a crystal ball, but rather one tool among many to help gauge whether market valuations make sense relative to economic fundamentals. As of now, it suggests investors should remain cautious, especially in the near term. The market may not be poised for another leg down, but it also may not offer much reward for the risk being taken.
Data:
The Federal Reserve Bank, retrieved on April 7, 2025:
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20250319.pdf
U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, April 7, 2025.
Yahoo! Finance, S&P 500 index data, retrieved from https://finance.yahoo.com/, April 7, 2025.
Disclosures:
The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author is responsible for any damages or losses arising from any use of this information. Past performance doesn’t guarantee future results.
Never miss an episode
Subscribe wherever you enjoy podcasts:
Apple
Spotify
Amazon
Our Mailing Address:
ECNFIN
1288 Kapiolani Blvd Apt 4003, Honolulu, HI 96814
Our Phone:
+1 720-593-1135
Our Fax:
+1 720-790-7606