The excitement surrounding artificial intelligence has yet to run its course on Wall Street.
Three analysts recently upgraded their forecasts for the S&P 500 (^GSPC) on early signs that investments in generative AI are driving earnings growth at major tech companies.
On Sunday, Evercore ISI’s Julian Emanuel raised his year-end price target for the S&P 500 from 4,750 to 6,000, noting that the “AI revolution is still in its infancy.” Emanuel’s target is the highest on Wall Street.
Goldman Sachs’ equity strategy team raised its year-end target to 5,600 from 5,200 on Friday. Goldman highlighted that rising earnings estimates for Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META) and Nvidia (NVDA) have “offset the typical pattern of negative revisions to consensus EPS estimates.”
“We underestimated the extent to which those gains would drive up those few stocks and the extent to which those few stocks would drive the rest of the market, and that’s really what we’re adjusting for,” Goldman Sachs equity strategist Ben Snider told Yahoo Finance. .
Citi’s equity strategy team, led by Scott Chronert, struck a similar tone, raising its final target to 5,600 from 5,100 on Monday. The analysts noted that the market would have moved toward their previous target if the big tech companies had not performed excessively.
“The generative AI influence as a sustained growth driver is currently permeating the U.S. equity environment,” Chronert wrote.
More than two-thirds of the S&P 500’s nearly 15% gain this year is attributed to the “Magnificent Seven” stocks: Tesla (TSLA), Apple (AAPL), Alphabet, Microsoft, Amazon, Meta and Nvidia, according to Citi.
If this “megacap exceptionalism” continues, Goldman’s model shows the S&P 500 could end the year at 6,300. This would likely stem from “sustained revenue increases for those companies compared to what analysts expect.”
Venu Krishna, Barclays’ chief U.S. equity strategist, currently has a 5,300 call on the S&P 500, but also noted that continued tech outperformance brings upside risk to his target and could result in a bull-case scenario where the S&P 500 ends the year above 6,000.
Krishna told Yahoo Finance that he has been asked for more than a year whether a small group of stocks can continue to drive the market higher.
“The answer is yes, it is possible,” said Krishna. “We are in that environment.”
Market concentration
The top-heavy market is concerned that the rally is too narrow. However, Streets say this should not deter investors.
Snider noted that it is important for investors to remember that if the trend of large-cap tech leading the S&P 500 higher continues, a narrow rally with just a few stocks leading the market higher will be a feature, not a bug, of is the benchmark index.
“This is part of the beauty of the S&P 500… If a few companies do really well, they can drag the entire index up,” Snider said. “And we see that now.”
There is also the risk that AI enthusiasm has pushed stock valuations too high. JPMorgan chief market strategist Marko Kolanovic, who stuck with Wall Street’s most bearish year-end S&P 500 target of 4,200, noted on June 3 that stock valuations are “rich” while sentiment is “almost at a peak” .
And Kolanovic has a point. Evercore ISI’s Emanuel pointed out that with the S&P 500 trading at more than 20 times its forward earnings estimates, the index is “expensive” on a historical basis. But what stands out to Emanuel is how long stocks can stay at that level.
According to Emanuel, the S&P 500’s price-to-earnings ratio exceeded 20,143 days ago. During the 2021 economic reopening, the S&P 500 traded at similar valuation levels for 614 days. During the dot-com boom, the S&P 500 lasted 737 days at this level.
Emanuel notes that this shows that “high valuations can stay high for longer.” And with that could come even more returns.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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