The hype around artificial intelligence has not yet caught on on Wall Street.
Three analysts recently upgraded their forecasts for the S&P 500 (^GSPC) amid early signs that investment in AI drives earnings growth in large-cap technology companies.
On Sunday, Evercore ISI’s Julian Emanuel raised his year-end price target for the S&P 500 from 4,750 to 6,000, noting that “the AI revolution is only just beginning.” 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 noted that rising earnings expectations for Alphabet (GOOGLE, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA) have “offset the typical pattern of negative revisions to consensus EPS estimates.”
“We underestimated how much these earnings would boost these few stocks and how much these few stocks would boost the rest of the market, and that’s basically what we’re adjusting for,” said Ben Snider, equity strategist from Goldman Sachs to 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 moved toward its previous target without the outsized performance of large-cap technology companies.
“The influence of generative AI as an engine for continued growth is currently permeating the U.S. stock market environment,” Chronert wrote.
More than two-thirds of the S&P 500’s nearly 15% gain this year is attributed to stocks in the “Magnificent Seven”: Tesla (TSLA), Apple (AAPL), Alphabet, Microsoft, Amazon, Meta and Nvidia, according to Citi.
If this “megacap exceptionalization” persists, Goldman’s model shows that the S&P 500 could end the year at 6,300 points. This would probably come from “revenues still higher than those expected by analysts”.
Barclays chief U.S. equity strategist Venu Krishna currently holds a 5,300 call on the S&P 500, but also noted that the tech sector’s continued outperformance presents upside risk to his target and could come to fruition. to 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 market higher.
“The answer is yes, it is possible,” Krishna said. “We are in this environment.”
Market concentration
The heaviest market has some worries that the rally is too narrow. However, strategists say this should not deter investors.
Snider noted that it is important for investors to remember that while the trend of large-cap tech stocks leading the S&P 500 higher continues, a narrow rally with only a few stocks leading the market higher is a feature, not a bug, in the benchmark.
“That’s part of the beauty of the S&P 500…When a few companies perform really well, they can drive the entire index higher,” Snider said. “And we’re seeing it right now.”
There is also a risk that enthusiasm for AI has pushed stock valuations too high. Marko Kolanovic, JPMorgan’s chief market strategist, who stuck to Wall Street’s most bearish year-end target for the S&P 500 of 4,200, noted on June 3 that valuations of Stocks are “rich” while sentiment is “near highs.”
And Kolanovic is right. Evercore ISI’s Emanuel pointed out that with the S&P 500 trading above 20 times its forward earnings estimates, the index is “expensive” on a historical basis. But what interests Emanuel is how long stocks can remain at these levels.
The S&P 500’s forward price-to-earnings ratio exceeded 20,143 days ago, according to Emanuel. In the economic reopening frenzy of 2021, 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 high for longer.” And that could lead to further returns.
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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