Goldman Sachs’s lead strategist David Kostin turned incrementally bullish on US stocks last week, raising the firm’s S&P 500 year-end target from 5,100 to a new Street high target of 5,200. This is the second upward revision in just three months for Goldman, highlighting growing optimism about corporate earnings.
The driver for a higher S&P 500?
Kostin is now forecasting an 8% profit growth for S&P 500 companies in 2024, driven by:
- Stronger US economic growth than previously expected, resulting in higher revenues and profits.
- Continued positive earnings surprises, especially from tech giants.
- Rebounding profit margins, particularly in the tech and communications sectors.
- Upbeat investor sentiment, with some analysts suggesting targets could still be too conservative.
The role of mega-cap tech stocks
Goldman notes that hitting the 5,200 S&P 500 target depends heavily on the ‘Magnificent Seven’ mega-cap tech names continuing to deliver strong earnings growth.
The ‘Magnificent Seve’ includes Meta (FB), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOG), Amazon (AMZN), Nvidia (NVDA), and Tesla (TSLA). These seven names make up over 22% of the S&P 500’s market capitalization.
Nvidia’s recent earnings results exceeded expectations, indicating the potential for sustained growth in the tech sector. Nvidia beat earnings and revenue expectations and is projected to see continued growth into 2025—”[f]undamentally, the conditions are excellent for continued growth.” Nvidia says.
Economic growth is likely the main driver
According to Goldman, the fourth quarter earnings season showed that companies can maintain profit margins amid persistent inflation worries. Stronger US economic growth should help continue the string of upbeat earnings surprises for mega-cap and big tech stocks.
On the flipside, poor growth in the macroeconomic environment for the rest of the year would hurt these large stocks. Or higher input costs means lower profit margins, which can put pressure on earnings growth.
Goldman also highlights that stronger GDP growth and a weakening US dollar could also play a role in boosting earnings per share across the S&P 500.
Upbeat Wall Street sentiment
Likewise, other major Wall Street banks are showing a similar bullish sentiment. Notably, Oppenheimer and Fundstrat expect the S&P 500 to rise above 5,200 by 2025 while RBC Capital and UBS have a 5,150 target. Yardeni Research has one of the most bullish estimates at 5,400.
On the other hand, not everyone is bullish. Morgan Stanley’s chief investment officer Mike Wilson is calling for a more conservative year-end forecast of around 4,500. Of the nearly a dozen bank estimates for the S&P 500, the median is 4,950.
Bottom line
The unexpectedly soft landing of the US economy has positively impacted Wall Street and corporate earnings. Big tech earnings growth is the key driver to watch for—and Nvidia’s strong recent earnings report is even more encouraging for bullish Wall Street estimates like Goldman’s.