The Goldman Sachs equity team has raised its price target for the broader market and for earnings for this year and next, largely influenced by the megacaps.
Positive Adjustment
The team has set its sights on the S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) price target just beyond current levels at 5,200.
“In December, we elevated our target from 4700 to 5100 to mirror a more dovish policy, lower real interest rates, and higher valuations than we had initially foresaw,” stated strategist David Kostin. “Our upgraded target today mirrors an improved earnings outlook.”
Rising Projections
Kostin also raised the top-down S&P 500 EPS predictions to $241 in 2024 and $256 in 2025, up from $237 and $250.
“The 4Q earnings season underscored the continuing fundamental strength of the mega-cap ‘Magnificent 7’ stocks: (AAPL), (AMZN), (GOOGL), (META), (MSFT), (NVDA), (TSLA),” Kostin highlighted. “If NVDA reports estimates in line with consensus, the Magnificent 7 will have achieved a 15% year/year sales growth and raised margins by 582 basis points year/year, contributing to a 58% earnings growth.”
“In comparison, the remaining 493 stocks in the S&P 500 experienced a 3% year/year sales growth while margins contracted by 56 basis points, leading to a 2% drop in earnings.”
Mixed Earnings Picture
“This weakness was primarily driven by Energy (XLE) and understates the growth of the ‘typical’ S&P 500 stock; the median index constituent experienced a 6% y/y EPS growth in 4Q,” he added.
Positive Impact on Profits
“The fundamental strength of the mega-cap stocks should also bolster aggregate S&P 500 profits in 2024,” Kostin said. “The strength of the Magnificent 7’s results has caused analysts to elevate their expectations for 2024.”
Optimistic Outlook
“In the past 3 months, Magnificent 7 earnings estimates have been positively revised by 7%, and margins have been adjusted upward by 86 basis points,” Kostin noted. “In contrast, there has been a 3% downward revision to earnings and a 30-basis-point downward revision to margins for the remaining 493 stocks. The Magnificent 7 accounted for 11% of total 2023 S&P 500 sales and 18% of earnings, and the consensus expects the stocks to grow EPS by 20% in 2024.”
Projection for Sectors
“We anticipate that Information Technology (XLK) and Communication Services (XLC) – which consist of 5 of the Magnificent 7 stocks – will record the most robust earnings growth among S&P 500 sectors in 2024,” Kostin mentioned. “We expect demand drivers including AI growth and consumer strength to support revenue growth in these sectors, while margins will continue to expand as these companies focus on operating efficiency.”
“The rest of the S&P 500 should also improve margins in 2024, but to a much smaller degree.”
