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Goldman lifts year-end S&P 500 target price to 5600 - Goldman Sachs has lifted its year-end target price on the benchmark S&P 500 index, citing strong earnings growth, particularly from the mega-cap tech stocks, and increased fair value.

The bank now sees the S&P 500 ending the year at 5600, up from its previous target of 5200, offering around 3% from Friday’s 5431.60 closing price.

The aggregate S&P 500 index has returned 15% since the start of the year, with five stocks accounting for 60% of the aggregate index’s year to date return - Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Alphabet’s (NASDAQ:GOOGL) Google, Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META). 

These stocks have collectively surged by 45% and now comprise 25% of the S&P 500 equity cap, according to analysts at Goldman Sachs, in a note dated June 14. 

The drivers of the rally include upward revisions to consensus 2024 earnings estimates for these same tech companies, and valuation expansion stemming from increased investor enthusiasm about artificial intelligence.

The five companies listed above posted 1Q year/year EPS growth of 84% vs 5% for the typical S&P 500 stock, prompting analysts to raise their 2024 EPS forecasts by 38% for these five tech stocks. In contrast, the profit forecast for the other 495 stocks in the index have been reduced by 5%. 

Consensus 2024 forecasts imply a 31 percentage point gap between EPS growth for these five stocks and the median S&P 500 firm (37% vs. 6%), Goldman said, but this gap is expected to narrow to 8 percentage points in 2025 and 4 percentage points in 2026.

The bank now expects the current bottom-up consensus 2025 EPS estimate will be lowered by just 2% through year-end, half the average historical revision.

“We expect revisions to consensus S&P 500 EPS estimates will continue to be milder-than-average through year-end given the upward revisions to mega-cap tech earnings that have already taken place this year,” the bank said.

“However, we maintain our earnings forecasts for 2024, as we believe consensus margin estimates for next year remain too optimistic.”

Looking ahead, the bank's valuation model suggests the S&P 500 P/E will be 20.4x by year-end, 3% below the current multiple of 21.1x. Strong consensus 2025 earnings growth and a roughly unchanged real yield imply a year-end 2024 fair value P/E multiple of 15x for the equal-weight S&P 500. 

The election remains a key risk to the S&P 500 level and falls between our 3-month and year-end forecast horizons, the bank said. 

Historically, during election years index volatility has increased before the election and the S&P 500 index has declined by 4% between late October and early November. Nevertheless, volatility typically subsides and the index rebounds to an even higher level following the election.

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