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Goldman Sachs analysts have reiterated their year-end S&P 500 (SP500) target of 5,200 points, but also see a situation in which continued gains in megacap tech stocks could boost the benchmark index to 6,000.
On Wednesday, the S&P (SP500) surged past the historic mark for the first time ever, with the gains largely driven by the Federal Reserve reinforcing expectations of three interest rate cuts this year. The index continued to push higher and eventually advanced 2.29% for the week to close at 5,234.18 points on Friday.
Having hit the 5,200 mark by late March, the index has blown past many brokerages' year-end estimates.
Goldman Sachs is sticking with its 5,200 expectation as it believes that 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 ranks in the 89th percentile since 1990 and the valuation of the equal-weight index ranks in the 93rd percentile. Given that just three months into the new year the S&P 500 (SP500) index trades at our year-end target, we explore four valuation scenarios that are different from our baseline," Goldman analysts led by David Kostin said in a note on Friday.
Of these scenarios, the most bullish sees a ~15% rise in the S&P 500 (SP500) from today's levels to end the year at 6,000 points. This advance would be largely driven by continued gains in megacap technology stocks, one of the key drivers of Wall Street's current bull.
"We previously argued that the current growth stock rally is different from the 2021 and Tech Bubble experiences because investors today focus on profitability. In addition, although (artificial intelligence) optimism appears high, long-term growth expectations and valuations for the largest TMT stocks are still far from 'bubble' territory," Kostin and the analysts said.
"The cap-weight S&P 500 index traded at a greater than 100% valuation premium to the equal-weight index during the Tech Bubble and at a 30% premium in 2021. Takeaways from NVDA’s GTC were encouraging and point to conditions of strong demand and constrained supply. Assuming a 16x NTM P/E for the equal-weight 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% above today," the Goldman analysts added.
The other three scenarios sees a "catch-up" situation in which the S&P 500 (SP500) would end the year at 5,800 points (+11% from current levels), a "catch-down" situation in which the index ends at 4,500 points (-14%), and a 4,500 year-end level amid heightened concerns about the economic outlook and price increased recession risk.
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