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Goldman Sachs has raised its year-end target for the benchmark S&P 500, driven by robust earnings growth, especially from mega-cap technology stocks, alongside a boost in fair value. The investment giant now foresees the S&P 500 closing the year at 5600, an upgrade from the prior estimate of 5200. This adjustment indicates a modest 3% gain from the recent close of 5431.60.
Notably, the S&P 500 has achieved a 15% return since the beginning of the year. Five tech behemoths—Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA), Google, owned by Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), and Meta Platforms (NASDAQ: META)—have been the primary catalysts behind this performance. Combined, these stocks have soared 45%, making up a quarter of the S&P 500's market capitalization.
The recent rally in these tech juggernauts is propelled by elevated 2024 earnings expectations and valuation growth due to surging investor interest in artificial intelligence (AI). In the first quarter, these five companies reported an 84% year-over-year increase in EPS, in stark contrast to the broader S&P 500's 5% growth. This has led Goldman analysts to ramp up their 2024 EPS projections for these technology firms by 38%, while forecasts for the remaining 495 companies in the index have been cut by 5%.
Consensus estimates for 2024 show a striking 31 percentage point difference in EPS growth between these tech leaders and the median S&P 500 company—37% versus 6%. Goldman suggests this gap will narrow over the next few years, predicting a difference of 8 percentage points by 2025 and just 4 percentage points by 2026.
Looking ahead, Goldman Sachs projects only a 2% decline in the current bottom-up consensus 2025 EPS estimate through year-end, markedly lower than the average historical revision. “Revisions to consensus S&P 500 EPS estimates are expected to remain milder-than-average for the remainder of the year, given the upward adjustments in mega-cap tech earnings already witnessed in 2023,” remarked the bank. However, Goldman sticks with its 2024 earnings forecasts, arguing that current consensus margin estimates for next year might be overly optimistic.
The bank's valuation model envisions the S&P 500 P/E ratio at 20.4x by year's end, a slight dip from the present multiple of 21.1x. With strong consensus earnings growth for 2025 and a relatively stable real yield, the bank foresees a year-end 2024 fair value P/E multiple of 15x for the equal-weighted S&P 500.
Goldman also highlights the upcoming election as a key factor posing a risk to the S&P 500 levels, falling between their three-month and year-end forecast periods. Historically, election years have witnessed heightened index volatility until the event itself, often resulting in a 4% dip between late October and early November. Nevertheless, this volatility typically ebbs post-election, with the index usually rebounding to even higher levels.
