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Analysts at Goldman Sachs reiterated their year-end S&P 500 (SP500) target of 5,200 points, but also see a situation where continued gains in megacap tech stocks could push the benchmark index to 6,000.
On Wednesday, the S&P (SP500) increased surpassed the historic threshold for the first time ever, with the gains largely led by the Federal Reserve reinforcing expectations of three interest rate cuts this year. The index continued to push higher and eventually Advance The week rose 2.29% to close on Friday at 5,234.18 points.
After reaching the 5,200 mark in late March, the index surpassed many brokers’ year-end estimates.
Goldman Sachs maintains its 5,200 expectation as it believes the expected path of the federal funds rate and above-consensus economic growth forecasts have been fully priced in by markets.
“However, the path of the S&P 500 (SP500) forward multiple is uncertain. Today, the forward P/E for the aggregate index has been in the 89th percentile since 1990 and the valuation of the equally weighted index has been in the 93rd “th percentile. As the S&P 500 Index (SP500) trades at our year-end target just three months into the new year, we explore four different valuation scenarios from our baseline,” they said in a Friday notes Goldman analysts led by David Kostin.
Of these scenarios, the most bullish sees the S&P 500 (SP500) rising approximately 15% from today’s levels to close the year at 6,000 points. This progress would be largely driven by continued gains in large-cap technology stocks, one of the key drivers of Wall Street’s current rally.
“We have previously argued that the current rally in growth stocks is different from the experiences of 2021 and the tech bubble because investors today are focused on profitability. Furthermore, while (AI) optimism appears high, expectations of long-term growth and valuations for major TMT stocks are still far from “bubble” territory,” Kostin and analysts said.
“The top-weighted S&P 500 Index traded at a valuation premium of more than 100% to its peer-weighted index during the tech bubble and at a 30% premium in 2021. NVDA’s GTC results were encouraging and indicate conditions of strong demand and limited supply.Assuming a 16x NTM P/E for the peer-weighted index and a 45% P/E premium for the market cap index, the aggregate S&P 500 would trade at a forward P/E of 23x, 10% higher than today,” Goldman analysts added.
The other three scenarios see a “recovery” situation in which the S&P 500 index (SP500) would close the year at 5,800 points (+11% compared to current levels), a “recovery” situation in which the index closes to 4,500 points (-14%) and a year-end level of 4,500 amid growing concerns about the economic outlook and rising recession risk prices.