(Bloomberg) – The rally in U.S. stocks will broaden beyond megacap tech names if history is any guide, Goldman Sachs Group Inc. strategists said in a report raising their year-end target for the S&P 500.
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The gauge will end 2023 at 4,500, strategists including David J. Kostin wrote in a note dated June 9, raising the forecast to 4,000. That implies a 4.7% increase from Friday’s close and nearly than half of the returns expected by the consensus over the next 12 months, according to data compiled by Bloomberg.
The rally is expected to broaden beyond technology as “previous episodes of sharp reduction in magnitude have been followed by a catch-up to broader revaluation,” they wrote. Since 1980, the gauge has seen nine such key episodes, which were eventually followed by a catch-up in other stocks that ultimately benefited the S&P 500, they added.
The gauge has gained 20% since its October low, joining the Stoxx Europe 600, Germany’s DAX and South Korea’s Kospi in its fifth technical bull market in about three decades. Concerns about sticky inflation and slowing growth have been replaced by expectations of a pause in interest rate hikes and strong profitability. The rally has also started to show signs of widening, with the Russell 2000 Index outperforming the S&P 500 since early June.
Kostin and his colleagues said on Feb. 10 that European and Asian stocks are more attractive to investors than US stocks this year due to an expected decline in corporate earnings in 2023. Since then, the S&P 500 has been rising 5.1%, while key indicators for Asia and Europe were little changed.
Goldman’s call for higher S&P 500 returns aligns with the outlook of Bank of America Corp.’s Savita Subramanian, whose analysis shows the S&P 500 extended gains in the 12 months after breaking through the breakout point. 20% rollover 92% of the time in data going back to the 1950s.
BofA says bull market in stocks means more gains 92% of the time
Meanwhile, Morgan Stanley’s Michael Wilson, who was one of the few Wall Street strategists to see the 2022 meltdown coming, earning him the top spot in Institutional Investor magazine’s survey of the last year, remains skeptical. He sees the narrow breadth of the rally as a warning sign, along with lofty valuations and outperformance of defensive stocks.
Goldman sees downside risks primarily from an unexpected slowdown in growth and stubborn inflation setting off a hawkish trajectory for Federal Reserve policy.
As the S&P 500 trades at its highest earnings-based valuation since April 2022, the Goldman team said the combination of slowing inflation, healthy growth and high concentration market trends suggest that current valuations may persist.
“Our economic and earnings forecasts also suggest that a catch-up is more likely,” they wrote, saying their likelihood of a recession over the next 12 months is below consensus, while earnings forecasts are above those. of their peers.
The potential increase in profits due to the boom in artificial intelligence has also “improved the distribution of equity outcomes”, they said.
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