Wall Street thinks stocks have room to run even higher than originally thought

The high-water mark for Wall Street’s S&P 500 (^GSPC) predictions has moved up yet again.

The benchmark index has hit new record highs to kick off 2024. The surge in stocks has already put the S&P above the average Wall Street strategist year-end target less than two months into the year. And now, two strategists are boosting their projections for how far stocks can run in 2024.

Last week, Goldman Sachs boosted its year-end target from 5,100 to 5,200. On Tuesday, UBS also boosted its target. The UBS Investment Bank equity strategy team led by Jonathan Golub now sees the S&P 500 ending this year at 5,400, up from a prior call of 5,100. This reflects nearly an 8% increase from Tuesday’s opening price.

“Despite our bullish outlook, it appears we were not bullish enough,” Golub wrote.

Both Goldman Sachs and UBS expressed a more upbeat outlook for corporate earnings this year than previously forecast when describing why they see further upside in stocks.

Their new predictions come as earnings for S&P 500 companies are now expected to grow 3.2% in the fourth quarter, up from a 1.9% projection a month ago, per FactSet. For the full year 2024, analysts project the S&P 500 will grow 10.9%.

In a research note boosting the bank’s S&P 500 projection on Feb. 16, Goldman Sachs chief US equity strategist David Kostin wrote earnings growth will be “the primary driver” of remaining upside for stocks during 2024.

Kostin noted that the more upbeat outlook on earnings stems from “upgraded outlooks on US economic growth and mega-cap profit margins.” Specifically, Goldman’s call on earnings growth stems from megacap companies.

The Charging Bull or Wall Street Bull is pictured in Manhattan, Jan. 16, 2019. (Carlo Allegri/REUTERS) (REUTERS / Reuters)

In the past three months, earnings estimates for the “Magnificent Seven” tech stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) have increased by 7%. Meanwhile, margin expectations have been revised up 86 basis points. This contrasts trends seen across the other 493 stocks, which have seen a downward earnings revision of 3% and 30 basis point downward revision in margins.

This leads Goldman to believe the Technology (XLK) and Communication Services sectors (XLC), which include five of the seven Magnificent Seven stocks, will lead the earnings growth in 2024.

“We expect demand drivers including AI growth and consumer strength will support revenue growth in these sectors, while margins will continue to expand as these companies focus on operating efficiency,” Kostin wrote.

He added: “The rest of the S&P 500 should also improve margins in 2024, but to a much smaller degree.”

Goldman Sachs projects an outsized portion of the S&P 500's net profit margin growth in 2024 to come from two sectors: Information Technology and Communication Services.

Goldman Sachs projects an outsized portion of the S&P 500’s net profit margin growth in 2024 to come from two sectors: Information Technology and Communication Services. (Goldman Sachs Global Investment Research)

Of course, there are still many risks to the stock market rally. One that has weighed on stocks in recent days is the prospect of sticky inflation. Stocks sold off on Feb. 13 in reaction to a hotter-than-expected inflation report that sparked fears that the Federal Reserve may not cut interest rates as soon as hoped.

But UBS’s Golub points out that sticky inflation might not be all bad for corporates.

“Returns and profits are measured in nominal dollars. Put differently, higher inflation tends to be a positive for stock prices,” Golub wrote. “While the market sold off on more robust [Consumer Price Index] and [Producer Price Index] reports last week, our work indicates that these demand-driven readings are constructive for future returns.”

A graph from UBS shows that

A graph from UBS shows that “earnings benefit from higher inflation.” (UBS Investment Bank)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

Source link