Goldman raises S&P 500 target with earnings optimism to drive rally

(Bloomberg) — Just months after setting a 2024 target for the S&P 500, strategists at Goldman Sachs Group Inc. Their forecasts were revised down for the second time, reflecting Wall Street's optimistic earnings outlook.

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“Increasing earnings estimates are the driver of the revision,” a team led by David Kostin wrote in a note to clients dated Friday. Forward 12-month earnings expectations reached a record high for a US stock index after forecasts hit their lowest levels a year ago.

Kostin now sees the S&P 500 rising to 5,200 by the end of this year, which would mean a 3.9% rise from Friday's close, raising his forecast from the 5,100 level he predicted in mid-December.

He initially predicted in November that the S&P 500 would hit 4,700 by the end of this year, but the measure has already surpassed the milestone of 5,000 this month.

Goldman's 5,200 price target for the S&P 500 in 2024 is now among the highest on Wall Street, joining the ranks of bulls including Fundstrat Global Advisors' Tom Lee and Oppenheimer Asset Management chief strategist John Stoltzfus, both of whom hold similar forecasts. For the end of the year.

Strategists at the company upgraded their EPS forecasts for this year to $241 and $256 in 2025, from $237 and $250 previously. This reflects their expectations of stronger economic growth and higher profits for the information technology and communications services sectors, which contain five of the so-called Magnificent Seven stocks, including Apple Inc., Microsoft Corp., Nvidia Corp. and Alphabet Inc. and Meta Platforms Inc.

The new estimate falls above the average top-to-bottom strategy forecast of $235.

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The ongoing earnings season so far has confirmed what the bulls have been predicting all along: earnings are holding up well. Of the approximately 84% of S&P 500 market capitalizations announced so far, 79% of companies beat expectations. Investors broadly rewarded these stocks, which outperformed the benchmark index by an average of 0.7% on results day, according to data compiled by Bloomberg Intelligence.

The reporting period was mixed for the Great Seven. While Meta, Amazon and Microsoft beat expectations, Tesla disappointed and Apple reported weakness in China. Investors are largely anticipating Nvidia's earnings due later this week to confirm that the stock can meet the high expectations set by the boom in artificial intelligence.

Goldman strategists expect valuation multiples for both the S&P 500 and its equal-weight peers to remain close to current levels — at 20 and 16 times earnings, respectively, “making earnings growth the main driver for staying on the upside this year.”

The S&P 500 is up 4.9% this year after a strong 2023, buoyed by expectations of a dovish policy shift by the Federal Reserve and with rising AI optimism for technology stocks. Earnings at the 500-member scale are expected to grow 8.8% in 2024 from last year, data compiled by Bloomberg Intelligence shows.

The S&P 500 hit an all-time high for the first time in two years in January, while the Nasdaq 100 hit its first record high in a similar period in December after the Federal Reserve signaled that its aggressive interest rate hikes to contain inflation were slow. Likely to expire. Cuts are on the table for 2024.

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Wall Street peers, such as those at Bank of America Corp, have signaled a willingness to raise their year-end targets as well on the idea that investors are not optimistic enough. The average S&P 500 target by nearly a dozen equity strategists tracked by Bloomberg currently stands at 4,950 points through mid-January.

“The biggest risk to the S&P 500 in the near term is to the upside,” Bank of America's Savita Subramanian said on Bloomberg TV earlier this month. “Our target of 5,000 is probably too low in the near term.”

Even Morgan Stanley's Michael Wilson – among Wall Street's most prominent dovish voices – now expects gains in the US stock market to extend to less popular corners of the Big Tech companies that have dominated the rally so far. Its 2024 target remains at 4,500, which would mean a roughly 10% decline from Friday's close.

–With the help of Elena Bubina.

(He adds context throughout.)

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