Goldman Sachs Raises Broad Market and Earnings Forecast Based on Megacap Strength

Boosting Market Forecast

The Goldman Sachs equity team has upped its price target for the broader market as well as for earnings in the current and following year. The adjustment, in significant part, is credited to the performance of the megacap stocks.

Earnings and Market Projections

The team has elevated its S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) price target slightly above existing levels to 5,200.

The strategist at Goldman Sachs, David Kostin, stated, “In December, we lifted our target from 4700 to 5100 to reflect an outlook for more dovish policy, lower real interest rates, and higher valuations than we had originally expected. Our target upgrade today reflects an improved earnings outlook.”

Kostin has also raised the top-down S&P 500 EPS forecasts to $241 in 2024 and $256 in 2025, up from $237 and $250.

The Magnificent 7

Referring to the significant outperformance of seven major stocks – (AAPL), (AMZN), (GOOGL), (META), (MSFT), (NVDA), (TSLA), Kostin remarked, “The 4Q earnings season also highlighted the ongoing fundamental strength of the mega-cap ‘Magnificent 7’ stocks. If NVDA reports estimates in line with consensus, the Magnificent 7 will have grown sales by 15% year/year and lifted margins by 582 basis points year/year, leading to earnings growth of 58%.”

Kostin added, “In contrast, the remaining 493 stocks in the S&P 500 grew sales by 3% year/year while margins contracted by 56 basis points and earnings fell by 2%.”

He emphasized, “The fundamental strength of the mega-cap stocks should also boost aggregate S&P 500 profits in 2024. The strength of the Magnificent 7’s results has caused analysts to lift their expectations for 2024.”

Analyst Expectations and Market Implications

In the past three months, Magnificent 7 earnings estimates have been revised upwards by 7%, and margins have been revised upwards by 86 basis points, significantly surpassing the 3% downward revision to earnings and 30 basis points downward revision to margins for the remaining 493 stocks. The Magnificent 7 accounted for 11% of total 2023 S&P 500 sales and 18% of earnings, and consensus expects the stocks to grow EPS by 20% in 2024.

Kostin concluded, “We expect the Information Technology (XLK) and Communication Services (XLC) – which contain 5 of the Magnificent 7 stocks – will post the strongest earnings growth among S&P 500 sectors 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. The rest of the S&P 500 should also improve margins in 2024, but to a much smaller degree.”