Goldman Sachs raises S&P 500 target to 5,200, thanks to heavy intervention from Big Tech

Just days before Nvidia Corp.’s potentially crucial results, Goldman Sachs raised its S&P 500 year-end target to 5,200, but much of that hinges on Big Tech’s ability to continue generating strong profits.

“Our updated 2024 EPS forecast of $241 (8 percent growth) is higher than strategists’ top-down median forecast of $235 (6 percent growth) and reflects our expectation for stronger economic growth strong and higher profits for the information technology and communications services sectors, which contain 5 of the ‘Magnificent 7’ stocks,” a team led by David Kostin, chief US equity strategist, said in a note late Friday.

With its new target, Goldman is catching up with some of Wall Street’s most bullish forecasters: Oppenheimer’s John Stoltzfus and Fundstrat’s Tom Lee, who also see a target of 5,200 after each of the carefully defined 2023 rallies. In the lead is Ed Yardeni of Yardeni Research, with a target of 5,400.

This is the second time Goldman has raised its S&P 500 target, following the surge to 5,100 from 4,700 at the end of December. Earlier this year, RBC Capital raised its S&P 500 forecast to 5,150 from 5,000 and UBS raised its target to 5,150 from 4,850.

Behind this new forecast is a more bullish economic outlook: Goldman economists recently raised their US real GDP growth forecast for the fourth/fourth quarter of 2024 to 2.4% due to higher consumer spending and residential investments. That’s because they expect an S&P 500 forward price-to-earnings multiple of 19.5x, slightly lower than the current 20x.

“The nearly completed fourth-quarter earnings season highlighted companies’ ability to sustain profit margins despite slowing inflation,” Kostin and his team said.

But the bank’s brighter prospects depend on Big Tech’s ability to continue operating. Kostin and his team noted how the fourth quarter “highlighted the continued fundamental strength” of the Magnificent 7 Meta Platforms META titles,
Apple’s AAPL,
GOOGL alphabet,
Neflix NFLX,
and Nvidia NVDA,

Analysts have warned that Nvidia’s earnings, due Wednesday, could mark a make-or-break moment for the stock, with expectations for earnings per share of $4.59, a rise of more than 700% from the same quarter last year.

Light: Bullish Bets on Nvidia and Other Members of the “Magnificent Seven” Near Busiest Levels in Year

As Deutsche Bank strategist Jim Reid told clients on Monday, “It’s a reflection of the world we live in that the biggest event of the week could be Nvidia’s earnings result on Wednesday. It is now the fourth largest company in the world and the best performer in the S&P 500 so far this year (+46.6% year to date), so this will be very important for sentiment.”

Addressing Nvidia’s earnings directly, Goldman strategists said that if the chipmaker reported estimates in line, “the Magnificent 7 would grow sales by 15% year/year and increase margins by 582 basis points year/year, leading to earnings growth of 58%.”

The bank expects information and communications technology services, which comprise five of the Magnificent 7 – Meta, Microsoft, Apple, Alphabet and Nvidia – to post the strongest earnings growth among S&P 500 sectors this year. The rest of the index will see some slight improvements, but “to a much lesser extent,” they said.

Goldman added that the strength of the Big Tech sector has also pushed forecasts higher among its peers, with Magnificent 7 earnings estimates revised upward by 7% over the past three months and margin forecasts by 86 basis points. This compares with downward revisions of 3% and 30 basis points to earnings and margin forecasts for the rest of the 493 stocks.

The bank said stronger-than-expected U.S. growth or continued upside surprises from mega-caps could both be upside risks to its forecast.

“Similarly, disappointing growth in the macroeconomy or from larger stocks would create downside risk to our S&P 500 earnings forecast. Additionally, an acceleration in input cost inflation would dampen the outlook for the nascent rebound of profit margins and thus for large growth in company profits,” said Kostin and his team.

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