The bull market in the S&P 500, which began two years ago, continues to thrive, fueled by optimism surrounding artificial intelligence (AI) advancements and the resilience of the U.S. economy. The index has surged over 60% during this period and is currently trading close to its all-time highs. Wall Street strategists remain optimistic about the market’s trajectory, predicting further gains barring any unforeseen shocks.
Current State of the Bull Market
Officially recognized in June 2023, the bull market in the S&P 500 was triggered when the index rose 20% from its recent bear market low. Historical trends indicate that this bull market still has significant potential; at two years old, it is well below the average duration of 5.5 years. Furthermore, the total return of around 60% contrasts sharply with the average gain of approximately 180% over a typical bull market, according to Ryan Detrick, chief market strategist at Carson Group.
Positive Projections Ahead
Several Wall Street equity strategists have recently revised their year-end price targets for the S&P 500, suggesting that the index could continue to climb. Notably, BMO Capital Markets raised its target from 5,600 to a street-high of 6,100, citing stronger-than-expected market gains. Goldman Sachs also boosted its year-end target to 6,000, with a 12-month target of 6,300. Despite these bullish predictions, Goldman Sachs’ chief equity strategist, David Kostin, cautioned that elevated valuations might limit upside potential as the market approaches 2025.
Challenges Ahead
While the outlook is generally positive, strategists acknowledge potential challenges that could hinder the bull market’s continuation. High valuations, particularly in terms of the trailing 12-month price-to-earnings ratio, are drawing comparisons to the dot-com bubble of the late 1990s. Kevin Gordon, senior investment strategist at Charles Schwab, noted that this level of valuation historically indicates a mature or nearing end of a bull market.
However, strategists argue that high valuations alone do not signal an imminent market downturn. Stocks can maintain high valuations for extended periods. The key issue is whether the market has already priced in much of the favorable news regarding economic resilience and earnings growth. Scott Chronert, an equity strategist at Citi, noted that the current pricing reflects a “soft landing” sentiment for the economy.
Potential Catalysts for a Market Correction
Market corrections often stem from two primary catalysts: rising interest rates or increasing unemployment. With inflation rates decreasing significantly from the highs seen in 2022 and unemployment remaining stable, neither of these catalysts appears to be imminent. While unforeseen events could trigger a market correction, the prevailing sentiment is that gradual changes in economic narratives are manageable for investors.
The Shift to Earnings-Focused Growth
As the bull market matures, the focus is shifting from macroeconomic indicators to fundamental earnings growth. For sustained upward movement in stock prices, earnings growth must outpace expectations. Analysts project earnings growth of nearly 10% in 2024 and approximately 15% in 2025. Investors will need to identify sectors experiencing accelerating earnings growth rather than stagnation.
Chronert emphasized that the AI narrative, which has significantly influenced stock performance, will continue to play a critical role. While the “Magnificent Seven” tech stocks have seen substantial gains, there is growing interest in how AI can impact companies beyond those directly involved in producing AI technology. For AI’s potential to further enhance market performance, companies must demonstrate improvements in profit margins and profitability metrics over the next two to five years.
Conclusion
As the bull market celebrates its second anniversary, Wall Street remains optimistic about the potential for continued gains, driven by robust earnings and economic stability. However, the combination of high valuations and potential catalysts for downturns suggests that investors should remain vigilant. The transition towards an earnings-focused growth narrative will be crucial in determining which sectors will lead the market in the coming years.
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