After a brief downturn in April, the US stock market has returned to bullish control driven by technology stocks, and the S&P 500 index has reached a historic high of 30 times this year.
Despite the cautious attitude of the Federal Reserve towards policy shifts, economic data boosting expectations of interest rate cuts, a blueprint for the future of artificial intelligence, and strong corporate profit expectations have once again brightened the market outlook. Many institutions have raised their target prices for the US stock market this year.
The highest target for the S&P 500 index is 6000 points
This week, Citigroup raised its year-end target for the S&P 500 index from 5100 points to 5600 points. Scott Chronert, the chief strategist of the bank, also believes that the sustained upward trend in profits and the expansion of profit growth to non tech stocks have driven the target level up. Meanwhile, Citigroup has raised S&P's earnings per share forecast for this year from $245 to $250.
The Federal Reserve held interest rates unchanged at this month's interest rate meeting, and the interest rate chart shows a rate cut once in 2024. However, multiple price indicators released last week indicate that the anti inflation trend is expected to return. According to data from the FedWatch Tool on the Chicago Mercantile Exchange, the balance of interest rate cuts this year is once again shifting back twice.
BMO Capital Markets Senior Economist Sal Guatieri previously stated in an interview with First Financial reporters that the market has once again surpassed the Federal Reserve, although it is still too early. Only with a substantial easing of the labor market situation and the recovery of the downward trend of inflation can the possibility of a rate cut in September be increased. This means that economic data from now until the Jackson Hole Conference will be particularly important.
Goldman Sachs announced last week that it will raise its year-end target for the S&P 500 index from 5200 points to 5600 points. A team of strategists led by David Kostin pointed out that Microsoft, Nvidia, Google's parent company Alphabet, Amazon, and Meta account for 25% of the index's market value, contributing most of the index's gains. The EPS of these tech giants increased by 84%, while the EPS of the other 495 companies only increased by 5%, and the enthusiasm of investors for artificial intelligence further boosted valuations. As profits continue to rebound, Goldman Sachs' valuation model suggests that the year-end P/E ratio of the S&P 500 index will be 20.4 times, 3% lower than the current 21.1 times.
Evercore ISI has raised its target price for the S&P 500 index to 6000 points, making it currently the most optimistic forecast on Wall Street. Julian Emanual, Senior Managing Director of Evercore ISI, wrote in a report last Sunday (16th), "The backdrop of slowing inflation, the Federal Reserve's intention to cut interest rates, and stable growth in corporate profits will support the blonde economy, so there is still room for future gains."
Technology stocks continue to be the target of capital pursuit. The latest survey by Bank of America Global on $721 billion asset funds shows that institutions continue to bet on tech giants. A survey shows that up to 69% of respondents believe that long trading in technology stocks has maintained its position as the most crowded trading for the 15th consecutive month. Meanwhile, 64% of fund managers stated that they now expect the economy to achieve a "soft landing" in the next 12 months, up from 56% in May.
Hot Tide and Hidden Worries
Behind the sustained rise, the US stock market has also entered a period of low volatility, with the panic index VIX, which measures market volatility, hovering at a low level for the year. According to financial data provider Sofi, the S&P 500 index has just hit its longest daily decline of less than 2% in nearly four years.
Although low volatility is often a characteristic of bull markets, it can also be a breeding ground for triggering adjustments. Recently, the manufacturing, real estate, and transportation industries are facing increasingly fierce challenges. Considering the postponement of interest rate cuts, the debate on the US economic outlook on Wall Street has once again heated up. "New Bond King" and CEO of Double Line Capital, Jeffrey Gunlach, reiterated last month that the US economy will enter a recession. He believes that a recession may arrive later in 2024 or 2025.
Market concentration and overly consistent expectations are also hidden dangers. The majority of the returns of the S&P 500 index are related to large cap technology stocks, which makes the bidirectional impact of the trend of heavyweight stocks undeniable. On the other hand, as the November election approaches, policy differences and election trends between the two parties may also affect investor sentiment.
Goldman Sachs raised its target level while warning that if economic data worsens, the likelihood of a recession is higher, and the S&P 500 index may fall to 4800 points by the end of the year, a 12% decrease from current levels. On the other hand, the key risk faced by today's market leaders is that the optimistic sentiment of artificial intelligence will bring higher thresholds.
Along with the rise of share prices, there is also a rising valuation. The market has also smelled the smell of the Internet boom at the beginning of this century. John Hancock Investment Management pointed out in an email comment that the forward valuation of the technology industry - the 12 month P/E ratio - reached 30.9 times, the highest level since mid-2002. At that time, the US stock market was experiencing the bursting of the Internet foam.
However, if profit expectations continue to be raised, these concerns may be resolved. The institution found that technology is the only industry in the past five years to outperform the S&P 500 index. Different from the Internet era, technology stocks showed strong earnings growth, which is expected to continue. Therefore, the team still recommends that investors continue to increase their holdings in the industry, as overvaluation may not be sufficient to trigger meaningful selling. However, it is also recommended that clients increase their exposure to high-quality mid size stocks with lower valuations to help mitigate some valuation risks.