News
Enthusiasm for AI prompts three Wall Street banks to raise stock market forecasts
The excitement around artificial intelligence has not yet ended on Wall Street.
Three analysts recently updated their forecasts for the S&P 500 (^GSPC) amid the first signs that investments in AI is driving earnings growth in large-cap technology companies.
On Sunday, Julian Emanuel of Evercore ISI raised his year-end price target for the S&P 500 to 6,000 from 4,750, noting that “the AI revolution is in the early innings.” Emanuel’s target is the highest on Wall Street.
Goldman Sachs’ equity strategy team raised its year-end target to 5,600 from 5,200 on Friday. Goldman highlighted that rising earnings expectations for Alphabet (Google, GOOG),Microsoft (MSFT), Amazon (AMZN), goal (GOAL) and Nvidia (NVDA) “offset the typical pattern of negative revisions to consensus earnings per share estimates.”
“We underestimated the degree to which these earnings would lift these few stocks and the degree to which these few stocks would lift the rest of the market, and that’s basically what we’re adjusting for,” Ben Snider, equity strategist at Goldman Sachs, told Yahoo Finance. .
Citi’s equity strategy team, led by Scott Chronert, struck a similar tone, raising its final target to 5,600 from 5,100 on Monday. Analysts noted that the market would have trended toward its previous target if not for the outsized performance of large-cap technology.
“The generative influence of AI as an engine of continued incremental growth is permeating the US equity environment right now,” wrote Chronert.
More than two-thirds of the S&P 500’s nearly 15% gain this year is attributed to the stocks of the “Magnificent Seven”: Tesla (TSLA), Litter (AAPL), Alphabet, Microsoft, Amazon, Meta and Nvidia, according to Citi.
If this “megacap exceptionalism” continues, the Goldman model shows that the S&P 500 could end the year at 6,300 points. This would likely come from “continued increases in these companies’ revenues relative to what analysts expect.”
Barclays chief U.S. equity strategist Venu Krishna currently holds a 5,300 call on the S&P 500, but also noted that technology’s continued outperformance provides upside risk to his target and could result in a bullish scenario with the S&P 500 ending the year above 6,000.
Krishna told Yahoo Finance that he has been asked for more than a year whether a small group of stocks can continue to drive the bull market.
“The answer is yes, it is possible,” said Krishna. “We are in that environment.”
A sign for an Nvidia building is shown in Santa Clara, Calif., May 31, 2023. (AP Photo/Jeff Chiu, File) (ASSOCIATED PRESS)
Market concentration
The heaviest market some are worried that the rally is very narrow. However, strategists say this should not discourage investors.
The story continues
Snider noted that it is important for investors to remember that if the trend of large-cap technology leading the S&P 500 continues higher, a narrow rally with just a few stocks leading the market higher is a feature rather than a bug. of the benchmark.
“That’s part of the beauty of the S&P 500… When a few companies perform really well, they can drag the entire index up,” Snider said. “And we’re seeing that now.”
There is also a risk that enthusiasm for AI has driven stock valuations too high. JPMorgan chief market strategist Marko Kolanovic, who maintained Wall Street’s more bearish S&P 500 year-end target of 4,200, noted on June 3 that stock valuations are “rich” while the sentiment is “close to highs”.
And Kolanovic is right. Evercore ISI’s Emanuel highlighted that with the S&P 500 trading above 20 times its future earnings estimates, the index is “expensive” on a historical basis. But what catches Emanuel’s attention is how long shares can stay at these levels.
The S&P 500’s forward price-to-earnings ratio surpassed 20,143 days ago, according to Emanuel. In the frenzy of 2021’s economic reopening, the S&P 500 has traded at similar valuation levels for 614 days. During the dot-com boom, the S&P 500 remained at these levels for 737 days.
Emanuel notes that this shows that “high valuations can stay higher for longer.” And with that, new returns may come.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
Click here for in-depth analysis of the latest stock market news and events that move stock prices.
Read the latest financial and business news from Yahoo Finance