The S&P 500, already on pace for one of its best first quarter rallies in decades, has a lot more left in its tank over the coming year, Wall Street analysts are forecasting, as the AI-led investment rally continues to drive gains.
The stock index closed at a record 5,137.08 points on Friday, extending its year-to-date advance to around 7.7%, powered in large part by another leg higher in artificial-intelligence-chip stocks and ongoing gains for mega-cap names such as Meta Platforms (META) , Amazon (AMZN) and Microsoft (MSFT) .
Information technology and communications services, the two key tech segments of the S&P 500, have also contributed more than a third of the benchmark's overall fourth-quarter earnings of $475.2 billion, according to LSEG data.
That tally is likely to ease only modestly, to around 31.3%, over the current quarter, but is still likely to generate around $144 billion in share-weighted profits.
The concentration in Big Tech names that are driving the index's impressive gains remains a concern, given that around four stocks, including Nvidia (NVDA) , are responsible for nearly two-thirds of this year's advance, but analysts are also noting that history still supports the bullish market tenor.
Tom Logue, senior equity strategist for Commonwealth Financial Network, notes that over the past six decades, the S&P 500 has gained more than 5% on only 20 occasions, including this year.
Further gains, he notes, were recorded in 17 of the prior 19 times.
"Since 1957, the S&P 500 has returned more than 20% over a four-month time frame only 14 other times, with the last coming in the summer of 2020," Logue said.
"Twelve of those other 14 occurrences saw a double-digit return over the next 12 months, with the worst return being a positive 1.16% return."
Goldman Sachs: Tech fundamentals are solid
Goldman Sachs's David Kostin isn't as worried about the market concentration in AI-focused names as he might have been in the past. In a client note Monday he argued that the current rally is unlike the tech bubble of the early 2000s or the post-covid surge that ended in 2021.
"Unlike the broad-based 'growth at any cost' in 2021, investors are mostly paying high valuations for the largest growth stocks in the index," Kostin said.
"This dynamic more closely resembles the Tech Bubble than 2021," he added. "However, in contrast with the late '90s, we believe the valuation of the Magnificent 7 is currently supported by their fundamentals."
Bank of America's Savita Subramanian, agrees, saying that while the index mix of today — where around half the S&P 500 is loosely tied to the tech sector — is much different than it was in the early 1980s, it's also much healthier.
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"The S&P 500's mix shift since the '80s is a reason for bullishness: the index has half the debt, lower EPS volatility and has shifted from 70% asset-intensive to 50% asset-light companies today," she wrote as her team lifted its year-end target for the S&P 500 by 8%, to 5,400 points.
"As we exit an era of arbitrary, low-quality growth from free capital and global arbitrage, corporates have nimbly shifted focus to productivity," Subramanian said. "We expect the market to broaden beyond (AI and weight-loss drugs) themes but caution that passive inflows could drive continued momentum in U.S. growth/megacap tech stocks."
More Wall Street Analysts:
- Analyst who correctly warned Tesla stock could fall unveils new target
- Analysts race for new Palo Alto Networks price targets as shares plunge
- Analyst who forecast Nvidia stock could exceed $750 revamps target
A separate reading from Bank of America's weekly Flow Show report indicates investors are likely to extend their focus on AI gains. Around $4.7 billion flowed into tech funds last week, putting the overall allocation on pace for a record $98.8 billion this year.
“Investors who recognize and leverage this momentum will be well-positioned to ride the wave of the tech boom, potentially reaping substantial rewards in the process," said Nigel Green of the London-based advisory deVere Group.
"Investors who are serious about building long-term wealth can’t afford to overlook the seismic shift that AI is bringing to the forefront of the tech sector," he added.
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