Nearly five months into 2024, major stock indexes are near record highs.
Wall Street also does not consider this recovery to be over, as the outlook for profits and economic growth has increased steadily throughout the year.
Over the past two weeks, three stock strategists tracked by Yahoo Finance have raised their year-end targets for the S&P 500. Wall Street’s median target for the benchmark index now stands at 5,250, up from the median target of 4,850 on March 25. December. 30, according to Bloomberg data. The high street target also rose from 5,200 to 5,600 at the start of the year.
“The current environment is basically what the bulls expected, and they are getting it,” Ohsung Kwon, U.S. and Canadian equity strategist at Bank of America, told Yahoo Finance. “It’s basically a soft landing.”
Kwon explained that although inflation data came in hotter than expected at the beginning of the year, it has not yet indicated that price increases are reaccelerating. Meanwhile, other data signaled a slowing but strong economy, alleviating fears that accelerated growth could trigger another rise in inflation. In essence, this fed into the soft landing narrative that Wall Street bulls were hoping for heading into the year, according to Kwon.
BMO Capital Markets chief investment strategist Brian Belski noted that markets made an important shift as this data arrived. Markets are now pricing in about two rate cuts this year, down from a peak of nearly seven at the start of the year, according to Bloomberg data. This aligns with the Fed’s most recent projectionsin which authorities favored two or three rate cuts this year.
“It has become clear to us that we underestimated the strength of market momentum, especially given that investor expectations and Fed policy guidance have become essentially aligned relative to the significant disconnect that existed at the start of the year,” Belski wrote in a research paper. note on May 15th.
On that note, Belski raised his year-end target from 5,100 to 5,600 – a new high on Wall Street. He noted that with the level of strength seen in stocks at the start of the year, history says there are likely to be more gains in the future. In years when the S&P 500 rises more than 8% in the first five months of the year, as it just did, the index gains more than 7% to finish the year 70% of the time, according to Belski’s analysis of historical data .
Belski and other strategists who have upgraded their outlook for stocks this year have warned, however, that the stock rally likely won’t happen without more setbacks. Belski noted that April’s 5% pullback was weak compared to the usual 9%-plus seen in the second year of bull markets.
But given the rally in stocks earlier in the year, “if a more severe pullback occurs, it will likely occur at higher index levels than we previously anticipated,” Belski said, providing a higher landing point for the S&P 500 following a rebound .
‘Optimistically speaking’
At the start of the year, bullish Wall Street strategists were adamant that the key to the market’s recovery this year would be a continued recovery in corporate profits. And so far, that has happened. Profits grew 6% in the first quarter of 2024, the highest growth rate seen in nearly two years.
So far, what’s driving profits hasn’t changed significantly. Technology gains, like Nvidia’s explosive quarter last Wednesday, are driving most of the earnings growth in the S&P 500. But strategists believe the seeds are still present for a build-up through the end of 2024.
Kwon noted that the first stage of the AI cycle is already happening with profits growing at companies like Nvidia (NVDA) as tech giants like Alphabet (GOOG, GOOGL), Amazon (AMZN) and Microsoft (MSFT) invest in the growing technology. . But the rewards are starting to increase with recent recoveries in sectors such as utilities and energy.
“We no longer think it’s just about Nvidia,” Kwon said. “Things are broadening out… into energy, commodities, utilities, things like that.”
Kwon noted in a recent research note that Nvidia drove 37% of the S&P 500’s earnings growth last month. Over the next 12 months, it is expected to represent just 9%.
Deutsche Bank chief equity strategist Binky Chadha also believes other areas of the S&P 500 should contribute to robust earnings growth through the end of the year. He recently raised his target on the S&P 500 to 5,500 from a previous target of 5,100, but told Yahoo Finance that target has clear “upside risks.”
On the one hand, Chadha notes that although people are “talking optimistically,” equity positioning hasn’t changed much in the last three months. Deutsche Bank’s positioning measure shows that investors are “overweight” equities, but not at the “extreme” levels seen in 2021 and 2018.
For Chadha, this shows that there could be more room to compete in the shares, especially given that he feels the consensus is not currently valuing outperformance for the US economy.
Chadha highlights that expectations for the U.S. economy have just shifted from an imminent recession to trending at or below normal growth. If that consensus continues to rise and the U.S. economy grows again more than expected this year, amid what some believe could be a productivity boom for the U.S. workforce, it won’t be hard to see the S&P 500 reach 6,000, according to Chadha.
“We’ve come a long way, but it feels like we’re not all the way,” Chadha said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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