On Wall Street, excitement over artificial intelligence is still not over.
Three analysts recently upgraded their forecasts for the S&P 500 (^GSPC) amid early signs that investments in generative AI are driving revenue growth at big tech companies.
Julian Emanuel of Evercore ISI on Sunday raised his year-end price target for the S&P 500 to 6,000 from 4,750, noting that “the AI ​​revolution is still in its early stages.” Emanuel’s price target is the highest on Wall Street.
Goldman Sachs’ equity strategy team on Friday raised its year-end target to 5,600 from 5,200. Goldman highlighted that rising earnings estimates for Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META) and Nvidia (NVDA) “offset a typical pattern of downward revisions to consensus EPS estimates.”
“We underestimated how much these gains would boost a small number of stocks and how those small number of stocks would move the overall market. Essentially, we’re adjusting for that,” Ben Snyder, equity strategist at Goldman Sachs, told Yahoo Finance.
Citi’s equity strategy team, led by Scott Cronath, echoed that sentiment, raising its target to 5,600 from Monday’s 5,100. The analysts noted that but for the strong performance of big technology companies, the market would have continued to move toward its previous target.
“The impact of generative AI as a driver of continued growth is now permeating the U.S. equity market,” Kronert wrote.
According to Citi, more than two-thirds of the S&P 500’s roughly 15% gain this year can be attributed to the “Magnificent Seven” stocks: Tesla (TSLA), Apple (AAPL), Alphabet, Microsoft, Amazon, Meta, and Nvidia.
If this “mega-cap exceptionalism” continues, Goldman’s model suggests the S&P 500 could end the year at 6,300. This would likely result from “continued earnings beats from these companies relative to analyst expectations.”
Venu Krishna, U.S. equity strategist at Barclays, currently holds 5,300-point call options on the S&P 500, but he also noted that the continued outperformance of tech stocks poses upside risk to his target, which could lead to a bull scenario in which the S&P 500 crosses 6,000 by year-end.
Krishna told Yahoo Finance that questions about whether a small number of stocks can continue to drive the market higher have been floating around for more than a year.
“The answer is yes, it’s possible,” Krishna said. “We’re in that environment right now.”
Market concentration
Some are concerned the gains are too small in a crowded market, but strategists say that shouldn’t deter investors.
Snyder said if the trend of large tech stocks driving the S&P 500 rally continues, it’s important for investors to remember that a narrow rally, with only a few stocks driving the market, is a feature of the benchmark index, not a flaw.
“That’s one of the great things about the S&P 500: If a few companies are doing well, they can lift the whole index,” Snyder said. “And that’s what’s happening right now.”
There’s also the risk that the AI ​​craze is pushing stocks too high. Marko Kolanovic, chief market strategist at JPMorgan, who is sticking with Wall Street’s most bearish year-end target of 4,200 for the S&P 500, wrote on June 3 that stocks are “expensive” but sentiment is “close to the highs.”
Kolanovic has a point. Evercore ISI’s Emanuel noted that the S&P 500 is “expensive” historically, with the index trading at more than 20 times forward earnings. But the question for Emanuel is how long stocks can stay there.
According to Emanuel, the S&P 500’s forward price-to-earnings ratio surpassed 20 143 days ago. Amid the frenzy of reopening the economy in 2021, the S&P 500 traded at a similar valuation level for 614 days. During the dot-com boom, the S&P 500 stayed at that level for 737 days.
Emanuel said this suggests “high valuations are likely to remain high for an extended period of time,” which could lead to further gains.
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X translator.
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