The S&P 500 (^GSPC) bull market started two years ago and shows little sign of slowing down.
The S&P 500 index is up more than 60% over the past two years and hovers near all-time highs, driven by the rise of artificial intelligence hype and a surprisingly resilient U.S. economy.
Wall Street strategists who spoke to Yahoo Finance believe bulls could continue to run wild. Barring any unexpected shocks, earnings growth is expected to continue accelerating, and the path to upside appears clear as the economy appears to be on solid footing as the Federal Reserve cuts interest rates.
A bull market for the S&P 500 was officially declared in June 2023, with the index up 20% from its recent bear market lows. History tells us this bull market still has legs. The bull market is two years long, which is far short of the average of 5.5 years. And according to research by Ryan Detrick, chief market strategist at Carson Group, total returns to date have been about 60%, far from the average of 180%.
Over the past few weeks, several Wall Street equity strategists have been making the case that the benchmark index will rise further into year-end and 2025, supported by accelerating S&P 500 returns.
“We continue to be surprised by the strength of the market’s upward momentum and reiterate that more than a gradual correction is warranted,” Brian Belsky, chief investment strategist at BMO Capital Markets, said in a September note. “I have made the decision,” he wrote when raising his year-end price target. The S&P 500 rose to a high of 6,100 from its previous target of 5,600.
On October 4, Goldman Sachs raised its year-end target to 6,000 and set a 12-month target of 6,300. But David Kostin, chief equity strategist at Goldman Sachs, said the already high valuations could limit the upside in terms of how high the index can rise in 2025.
Risk to rally
Strategists who spoke to Yahoo Finance agreed with Kostin that already inflated valuations present challenges to how far stocks can rise. Kevin Gordon, senior investment strategist at Charles Schwab He pointed out that.
“This would indicate that the bull is much older or a little closer to the end of the world,” Gordon said.
But strategists often caution that high valuations in and of themselves are not a good indicator of the end of a bull market. Stocks may trade at prices that are considered overvalued for longer than expected. What this tells investors is that much of the good news that could push stock prices higher may already be priced in.
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“If you look at what the market is discounting right now, I would say a big part of what’s priced in is a soft landing,” Scott Kronert, equity strategist at Citi, told Yahoo Finance.
Arturo Di Modica’s Charging Bull statue in the Financial District of Manhattan, New York City, July 4, 2024. (Beata Zawrzel/NurPhoto via Getty Images) (NurPhoto via Getty Images)
Michael Kantrowitz, chief investment strategist at Piper Sandler, said high valuations in and of themselves are not the reason the bull market is over. A catalyst is required. He explained that there are two common reasons why market drawdowns occur: either interest rates spike or unemployment rates rise.
Neither of the two downside factors is clearly visible, as inflation is well out of the boil in 2022 and recent unemployment growth has stalled.
Of course, there is also the possibility of surprises that no one expected. But “it’s a little hard to understand where the shock is coming from,” Kronert said. “If things continue to unfold in stages, investors will be able to deal with a little bit of a change (in the economic story) here, a little bit of a change there…That’s when it becomes clearer more immediately, and in fact “It’s difficult to figure it out,” he says, adding that it will be solved soon. ”
This prepares the market for a change in the narrative. Kantrowitz said the current high valuations reflect a shift in the bull market from a macro-driven environment, where factors such as falling inflation and signs of economic recovery are pushing stock prices higher, to a more fundamentals-based environment. This suggests that there is a high possibility that this is happening.
“For this market to continue moving higher, it’s going to be all about earnings, especially in determining which stocks lead the way,” Kantrowitz said.
The hurdle to profitability remains high. Consensus expects revenue to grow nearly 10% in 2024 and 15% in 2025. The key for investors is to identify in which sectors earnings are accelerating rather than just being stable.
And according to Kronert, part of that story can come down to the two characters that defined the first part of the bull market: AI.
Kronert said his team remains the holder of the “Magnificent Seven” technology group and has no doubts that AI stories will continue to emerge in the market. But as these tech stocks have rallied sharply over the past two years on the back of strong profit growth, the growing impact of AI on companies that don’t manufacture AI chips or the cloud servers that run the new technology has become increasingly important. The focus may continue to shift.
For AI to continue to have a broader impact on the market and continue to drive index profit growth above expectations, “more companies must deliver on the promise of AI through margin (and) profitability metrics.” Kronert said.
He added: “We need to complete such a paper, which will take two to five years.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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