Wall Street's top analyst are pushing new price targets for the S&P 500 that suggest solid gains between now and the end of the year, powered in part by Federal Reserve rate cuts, outsized gains for megacap tech stocks and robust corporate earnings growth.
The S&P 500, which is up just under 3.5% for the second quarter, has produced 30 record closes this year, the most recent of which helped lift its 2024 gain to around 13.4%.
U.S. stocks in fact have enjoyed two full months of inflows from global investors, according to data from Bank of America's closely tracked 'Flow Show' report, which has added $6.3 billion to overall investment portfolios.
Related: Stocks fight Fed forecasts after rate cut bets reset
That certainly suggests investors see more gains on the horizon, with eyes on the start of the second quarter earnings season in around three weeks' time.
LSEG data suggest collective S&P 500 profits are set to rise around 10.7% from last year to a share-weighted $495.7 billion, firmly ahead of the 8% growth recorded over the first three months of the year.
Full-year earnings growth is also forecast at 10.7%, according to LSEG estimates, a pace investors see expanding to 14.2% in 2025.
Evercore ISI’s chief equity and quantitative strategist, Julian Emanuel, sees both the new dynamics of a postpandemic economy and the power of generative artificial intelligence pushing stocks even further over the next six months.
AI, interest-rate cuts and Goldilocks
“The pandemic changed everything,” Emanuel said in a note that lifted his price target for the S&P 500 to 6,000 points and was published late Sunday.
“Record stimulus, elevated cash balances and low leverage support the consumer, he added. "Then came AI. Today, [generative AI's] potential in every job and sector is inflecting. The backdrop of slowing inflation, a Fed intent on cutting rates and growth support Goldilocks.” (A Goldilocks economy grows steadily but not so much as to sharpen inflation.)
Rate traders, who saw their bets on a September rate cut whipsaw last week after a stronger-than-expected May employment report, revived their hopes of an autumn rate reduction following Thursday's inflation dataset.
The CME Group's FedWatch now suggests a 67.7% chance of a quarter-point rate cut in September, with similar odds for a follow-on move in December.
Related: Nvidia's shares flash key warning sign
The Atlanta Fed's GDPNow forecasting tool, meanwhile, points to a current-quarter growth rate of 3.1%, more than double the 1.3% advance over the first three months of the year.
The tech-led aspect to broader market gains, however, has given rise to concerns tied to the heightened risk of concentration in the benchmark S&P 500. The 10 biggest stocks in the index comprise around 35% of its overall market value.
That's the highest level on record and suggests that any pullback in AI sentiment needs to affect only a handful of names to profoundly the market benchmarks.
And given that the S&P 500 equal-weight index is trading at a 2009 low compared with its market-weighted benchmark, that risk is growing acutely higher each day.
Tech leadership in focus
Adam Turnquist, chief technical strategist for LPL Financial, says the lack of market breadth doesn't put the current bull market at risk, "but it does imply stocks could be due for a pause or pullback unless this rally begins to broaden out."
"It also puts added pressure for upside momentum in the megacaps to continue, where most of the heavy lifting has been done," he added, noting that Nvidia (NVDA) , Apple (AAPL) , Microsoft (MSFT) and Alphabet (GOOGL) are responsible for around two-thirds of the market's gains since the early April lows.
Related: Nvidia earnings seal Big Tech stock dominance
"However, concentrated leadership at important breakout points followed by a broader rotation has been the playbook of this 'Field of Dreams' bull market, where megacaps build the breakout, and other stocks follow," Turnquist said. "But now the question remains, if you build it, will they come?"
Goldman Sachs's David Kostin thinks so, arguing in a late Friday note that "stellar earnings growth by five megacap tech stocks have offset the typical pattern of negative revisions to consensus EPS estimates." This helped him boost his end-of-year price target for the S&P 500 by 400 points, to 5,600 points.
James Demmert, chief investment officer at Main Street Research in New York, argues that investor cash sitting in higher-earnings money market funds could also find its way into stocks over the coming months, adding more upside momentum to the major benchmarks.
"There are trillions of dollars in cash on the sidelines, which means many investors have been missing out on the stock rally over the past year. Cash on the sidelines, alongside FOMO or 'Fear of Missing Out', will likely enter the stock market over the next six months, pushing prices even higher," he said.
"While sometimes FOMO can be a sign of investors being too exuberant, we think this next round of FOMO will be driven by investors who were too cautious over the past 6-12 months," Demmert added.
More Economic Analysis:
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- Jobs report to highlight shift from hot inflation to cooling labor market
- Fed doesn't want to talk about stagflation. It might not have a choice.
Bank of America's chief U.S. equity strategist, Savita Subramanian, is also confident that stocks have more room to run, noting in a Friday report that of the 10 signposts that normally precede a market top, only around four have been triggered thus far, compared to the longer-term average of around seven.
"Investors cite rules spanning valuation, technical analysis, geopolitics, macroeconomics, behavioral finance and even skirt-hemline trends as indicators of market tops and bottoms," Subramanian and her team said.
"Remaining invested is generally superior to emotional selling," her team advised. "For the S&P 500, time is literally on your side: The probability of loss over a 1-day holding period is roughly equivalent to a coin flip, but drops precipitously as time horizons extend."
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