Goldman Sachs makes bold prediction for S&P 500
Investors are eagerly awaiting the future of the S&P 500 index, which has remained relatively stagnant since reaching a record high of 5,254 on March 28. Despite some fluctuations, the index currently sits at 5,222, just 0.6% below the peak.
So far in 2024, the S&P 500 has experienced a 9% climb. At the start of the year, stocks benefited from expectations of significant interest rate cuts by the Federal Reserve. However, these hopes were dashed due to persistently high inflation and a resilient economy.
Now, optimistic investors are shifting their focus to earnings. With 92% of S&P 500 companies having reported their first-quarter earnings, a combination of their results and analyst forecasts indicates a 5.4% profit increase compared to the previous year, according to FactSet.
If this number holds true, it would mark the largest gain in nearly two years. The surge in artificial intelligence (AI) technologies has also contributed to the positive performance of stocks. For instance, semiconductor giant Nvidia (NVDA), the leading producer of graphics processing units for AI activities, has witnessed an impressive 83% increase in its stock price this year.
However, the market is not without its concerns, particularly when it comes to valuations. As of May 10, the forward price-earnings multiple for the S&P 500 stood at 20.4, surpassing the five-year average of 19.1 and the ten-year average of 17.8.
Bulls argue that when adjusted for high interest rates, valuations are not exceptionally high. Only time will reveal the accuracy of this claim.
Additionally, the market’s reaction to both positive and negative earnings surprises is another cause for concern. According to FactSet, S&P 500 companies that reported positive first-quarter earnings surprises have only seen an average stock price gain of 0.9%.
Overall, the future of the S&P 500 remains uncertain, with investors eagerly watching for any signs of significant movement.
Is the stock market overvalued? That’s the question many investors are asking as they analyze the latest numbers.
According to recent data, companies that reported positive first-quarter earnings surprises saw a modest increase in stock prices. However, this increase was lower than the five-year average, indicating a potential slowdown in market growth.
On the other hand, companies that reported negative earnings surprises experienced a larger decline in stock prices compared to the five-year average. This suggests that investors may be less forgiving of underperforming companies in the current market climate.
Adding to the uncertainty, the Federal Reserve’s reluctance to cut interest rates has raised concerns among investors. Initially, there were expectations of multiple rate cuts this year, but now the consensus is down to only two or fewer cuts. Lower interest rates typically boost the stock market by stimulating economic activity and making stocks more attractive compared to bonds.
Goldman Sachs Chief U.S. Equity Strategist, David Kostin, shares a pessimistic view of the stock market. He predicts that there will be no significant returns for stocks for the remainder of the year. Kostin is particularly concerned about valuations, as investors are assuming a faster economic growth rate than what is currently being observed.
Growth stocks, in particular, have seen a significant increase in value over the past year, with the Russell 1000 Growth index doubling the Russell 1000 Value index. Technology giants like Alphabet, Meta Platforms, Microsoft, Nvidia, and Amazon have been leading the market’s upward trajectory.
However, Kostin warns that investors may be overly optimistic about the revenue potential of companies in emerging sectors like artificial intelligence. He believes that the market’s expected winners in AI will likely experience slower revenue growth than anticipated.
Overall, the current market conditions raise concerns about potential overvaluation and the sustainability of stock market growth. Investors should carefully evaluate their investment strategies and consider the potential risks associated with the current market climate.
The S&P 500 forecast for the end of the year is not too different from the median prediction of 21 strategists surveyed by Bloomberg, which is 5,170.
However, it is important to take these projections with caution, as Bloomberg columnist Jonathan Levin points out. In the past, there have been six other years when strategists predicted small or negative returns for the index at this time of the year. Yet, the market outperformed these forecasts every time, with returns of at least 12% in five out of the six years.
So, what should investors do in this situation? The best approach for most of us is to maintain a diversified portfolio and make only modest periodic changes, regardless of market conditions.