The S&P 500 has already soared close to 15% this year. At least one strategist thinks it has nearly 10% more to go, thanks to artificial intelligence.
On Friday, Capital Economics senior markets economist Thomas Matthews raised his year-end target for the S&P 500 to 6000, 9.6% above where the index closed on Thursday, from 5500. By the end of 2025, he sees the S&P 500 reaching 7000.
“We don’t see any reason for the S&P 500 to slow down,” he wrote in a research note.
Matthews says that although Capital Economics has long been bullish, the rally has surpassed even its high expectations. Last June, his target of 5500 for the end of this year was about 25% above where the
was trading. Today, it is less than 1% away.
He says he is confident that more gains are on the way because the index has risen as forecasts for earnings have increased, not because investors are paying a higher multiple of annual per-share profits to own stocks. Despite the S&P 500’s 2024 gain of 15% through the close on Tuesday, the price has only risen to around 21 times forward earnings from less than 20 times at the start of the year. That isn’t a worrisome stretch.
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“Our preferred excess earnings yield measure – the gap between the S&P 500’s forward earnings yield and a long-term real yield – could still fall a lot further (i.e. the valuation could rise), in our opinion, before it is suggestive of a bubble that’s about to burst,” he wrote.
Although some of the higher expectations for earnings underpinning the rally could prove too optimistic, profits have actually increased, so the more upbeat forecasts have fundamentals underpinning them.
Nor does Matthews “see any reason for EPS expectations to fall back,” given the continuing effect of AI. Capital Economics has previously noted that enthusiasm for big tech and the AI revolution seems reasonable, given the companies’ growing earnings and hoards of cash.
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While during the dot-com bubble, U.S. equities’ outperformance ended about a year before the market peak, Matthews doesn’t expect that dynamic to play out again, given how U.S.-centric AI is. “As such, we’re sticking with our story that as long as an AI bubble is the driving force behind the market’s gains, those gains will be largest in the U.S.,” he said.
Many others have come to the same conclusion. Earlier this week,
noted that for all the worries about the rally—market concentration, lagging software stocks, high prices—“it sure doesn’t feel like this AI train is slowing down one bit.” Trivariate Research argues that the market is likely to continue to give AI plays the benefit of the doubt.
Solita Marcelli,
UBS
’s
chief investment officer for the Americas, said that “there is a risk that fears about over-investment could lead to a correction,” in the second half of the year. Nonetheless, given that “AI looks likely to be one of the largest investment opportunities in history…investors need to ensure their portfolios are ‘AI enabled,’” she wrote.
AI stocks were trading lower on Friday after both the
and
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hit new highs earlier this week. Any pause will likely lead to speculation that that correction could be on the horizon, but longer term, it just keeps getting harder to bet against AI.
Write to Teresa Rivas at teresa.rivas@barrons.com
