The S&P 500 Shows Unwavering Strength
The S&P 500 has defied all expectations, surging confidently ahead despite looming risks and uncertainties. Breaking through crucial support levels in late September, the market has its sights set on a noteworthy milestone – reaching the bull case target of 6,000 by the end of the year. This remarkable ascent has been fueled by a confluence of factors: a Fed tilted towards lower interest rates and a buoyant outlook for earnings. The alignment of these two forces suggests that the 6,000 threshold may just be a pit stop on the way to even loftier peaks.
The S&P 500’s Trajectory Supported by Earnings Surge
Driving the current market momentum is the robust outlook for S&P 500 earnings. Projections for the third quarter of 2024, the fourth quarter, and the initial half of the following year, though tempered from earlier estimates, remain robust at 4.1%, 14.2%, and 13.5% respectively. Of particular note is the anticipation of a rebound in the fourth quarter, paving the way for sustained double-digit growth in the first half of the upcoming year. Against a backdrop of interest rate cuts by the Fed and promising economic indicators, forecasts for the coming year may actually underestimate the market’s potential.
The bullish trend is further underpinned by optimistic forecasts for dividends and share buybacks within the S&P 500. While not all companies in the index engage in these practices, the majority do, with expectations pointing to continued growth in 2025 at a rate equal to or surpassing 2024 levels. Goldman Sachs’ projections indicate that share repurchases in 2025 could surpass $1 trillion, reaching a historic high supported by earnings growth, lower interest rates, and resilient economic fundamentals.
Amidst intermittent signs of weakness in economic data for the current year, the overall outlook remains robust, with encouraging job growth and sustained wage inflation. Though a possible slowdown in GDP growth might pose a challenge to earnings, the projected range of 2% to 2.5% still represents a sturdy foundation.
Large Cap Tech Retains Focus: Shifting Dynamics Ahead
Large-cap tech stocks are expected to see continued appreciation through 2024 and early 2025. However, investors should brace for volatility, given the elevated VIX levels and emerging technical vulnerabilities. A word of caution to investors: rather than chasing soaring stock values, it’s prudent to await price corrections before entering the market, stick with quality investments, and be prepared for quick exits.
While the rally is projected to broaden across all sectors in 2025, encompassing strengths in healthcare, materials, communications, and technology, emphasis will remain on large caps and artificial intelligence (AI). Anticipated as the second and fourth fastest-growing sectors, communications and technology will continue to attract significant investment, particularly in industry leaders such as NVIDIA, Microsoft, Amazon, Google, and other AI-centric giants.
One looming risk for investors is the issue of market concentration. Given the market-cap-weighted nature of the S&P 500, the influx of capital into the tech sector poses a significant threat. The top five holdings in the S&P, including Apple, NVIDIA, Microsoft, and others, already make up 30% of the index, highlighting a genuine concern. Federal Reserve policies are expected to manifest in economic indicators and outcomes, potentially heralding a shift towards improved economic circumstances and a resurgence in small-cap stocks – factors that could spell the end of the bull market for large-cap equities.
This article is an analysis of the S&P 500’s remarkable journey towards 6,000 and was initially published on MarketBeat.