Wall Street Divided Between Optimism and Caution
Expectations of Corporate Earnings Improvement Fuel Bets on Further Gains
Will it rise further, or enter a correction phase? Amid the recent crossing of the 5000-point mark by the S&P 500 index on Wall Street, 'optimism' and 'caution' are intersecting, and Goldman Sachs has added weight to the forecast of further gains. It is expected that the S&P 500 index will jump to the 5200 level by the end of this year. The improvement in corporate earnings and the outlook for a soft landing of the U.S. economy are cited as the background factors.
According to Bloomberg and others on the 18th (local time), David Kostin, Chief Strategist at Goldman Sachs, stated in a recent investor note that the year-end forecast for the S&P 500 would be revised upward from 5100 to 5200. This follows an increase from the 4700 level in November last year to 5100 in December of the same year, marking another upward revision in about two months.
This is the highest level among the figures released by major Wall Street investment institutions and aligns with the forecasts of prominent Wall Street bulls such as Tom Lee of Fundstrat Global Advisors and John Stoltzfus of Oppenheimer Asset Management. It is about 3.9% higher compared to the closing price on Friday, the 16th. This indicates that there is additional upside potential in the New York stock market.
The reason Goldman Sachs has joined the ranks of Wall Street bulls is the improving earnings trend of major companies, including big tech firms. Goldman Sachs raised its earnings per share (EPS) forecast for this year from $237 to $256. In particular, it expects strong economic growth and higher profits in the information technology and communication sectors, which include five of the so-called 'Magnificent 7' stocks: Apple, Microsoft (MS), Nvidia, Google Alphabet, and Meta Platforms.
Strategist Kostin explained, "The strong fundamentals of large-cap stocks will drive the overall earnings of the S&P 500 index this year," adding, "The upward pressure clearly raising EPS forecasts comes from stronger-than-expected gross domestic product (GDP) growth and continued earnings surprises from large-cap stocks." According to data compiled by Bloomberg Intelligence, earnings of S&P 500 listed companies are estimated to increase by 8.8% compared to the previous year. Earlier, John Stoltzfus, Chief Strategist at Oppenheimer Asset Management, also predicted, "Consumers and businesses are maintaining surprisingly strong resilience. The stock market rally that began at the end of October last year will expand further." He forecasted a 9% increase in corporate earnings throughout 2024.
Following Goldman Sachs, Bank of America (BoA) and others are also expected to soon revise their S&P 500 forecasts upward. Bloomberg reported that as of mid-January, the median S&P 500 index forecast among 12 strategists from major investment banks was 4950, and some strategists, including those at BoA, indicated a willingness to raise their year-end forecasts. Mike Wilson, Chief Investment Officer (CIO) at Morgan Stanley and a representative bear, also predicted that the tech-driven rally could extend to other sectors. However, Morgan Stanley’s S&P 500 forecast for this year remains about 10% lower than the current level, at around 4500.
Fueled by the AI rally and expectations of a shift in the Federal Reserve’s monetary policy, the S&P 500 index, which has recently continued to hit record highs, slightly declined last week, halting a five-week winning streak. Accordingly, both inside and outside Wall Street, the possibility of a correction phase due to profit-taking from the rally and concerns over high valuations is being discussed. Especially this week, market volatility is expected to be high due to the release of the January Federal Open Market Committee (FOMC) minutes and Nvidia’s earnings announcement. Remarks from Fed officials are also scheduled one after another ahead of the March interest rate decision.
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