The S&P 500 Aims High: Targets 6,000 Amid Strong Earnings

The S&P 500 continues to rise, overcoming challenges as it breaks crucial support levels. In late September, the index surpassed significant thresholds and is now heading toward bull market targets around 6,000 by the end of the year. This upward movement is largely influenced by the Federal Reserve’s inclination toward lowering interest rates, coupled with a robust earnings outlook. With these two forces in sync, the 6,000 mark may merely serve as a waypoint on the journey to even greater heights.

Earnings Growth Fuels the S&P 500 Ascent

The prevailing sentiment driving the S&P 500 is the optimistic forecast for earnings growth. While estimates for the third quarter of 2024, the fourth quarter, and the first half of the following year have softened since summer, they remain impressive at 4.1%, 14.2%, and 13.5%, respectively. Notably, the third-quarter growth forecast has shifted slightly, yet it sets the stage for stronger performance in Q4 and continued double-digit growth early next year. Given the Fed’s rate cuts and the health of economic data, projections for the coming year may still be underestimated.

In addition to earnings, an anticipated increase in dividend payouts and share buybacks is also propelling the S&P 500 higher. While not every S&P 500 company engages in these practices, many do, with several participating in both. The expectations for 2025 highlight sustained growth in distributions at mid-single-digit rates and even higher single-digit percentages for repurchases. Goldman Sachs forecasts that share repurchases will exceed $1 trillion next year, a historic figure supported by strong earnings and favorable interest rates amid stable economic conditions.

Despite some weak economic indicators in 2024, the overall data is robust. Job growth has outperformed expectations, and wage inflation hovers around 4.0%. Although GDP growth is anticipated to slow, estimates ranging from 2% to 2.5% are deemed solid and may even be conservative.

Large-Cap Tech Dominates: Changes Expected in 2025

Large-cap technology stocks are poised for further gains in 2024 and early 2025, although investors should anticipate volatility due to the elevated level of the VIX and signs of internal weakness in the market. A prudent strategy for investors would be to avoid chasing stock prices upward. Instead, waiting for price corrections before entering the market and focusing on quality investments is advisable.

Looking ahead to 2025, sector performance is predicted to widen, with notable strength in healthcare, materials, communications, and technology. However, large-cap tech, particularly companies leveraging artificial intelligence, will likely remain the focal point. Noteworthy players such as NVIDIA, Microsoft, AmazonAMZN, and GoogleGOOG are expected to attract a significant amount of investment.

Investors should also be aware of the concentration risk that accompanies this surge. Since the S&P 500 is a market-cap-weighted index, significant inflows into tech can disproportionately influence market dynamics, particularly when the AI bubble begins to deflate. The five largest companies in the S&P, including Apple, NVIDIA, and Microsoft, already comprise 30% of the index, highlighting the inherent risks. Ultimately, the effects of Fed policies will manifest in broader data and outcomes, potentially leading to improved economic conditions and a resurgence in small-cap stocks that might challenge the current dominance of large-cap equities.

The article “The S&P 500 Defies Odds, Extends Rally With 6,000 in Sight” first appeared on MarketBeat.