Citi sees further S&P 500 upside during 2H24

Citi analysts project continued gains for the S&P 500 during the second half of 2024, albeit at a slower pace compared to the first half.

This optimistic outlook comes despite prevalent recession concerns, largely driven by significant investments in generative AI, which have counterbalanced traditional macroeconomic worries. "We look for further S&P 500 upside during 2H24 albeit at a moderated pace vs 1H," wrote Citi. 

The investment bank notes a major driving force behind the S&P 500's year-to-date (YTD) performance has been the "Mag 7," comprising leading tech giants like NVIDIA (NASDAQ:NVDA).

Citi notes that the market cap-weighted Mag 7 is up over 31% YTD, contributing 8.7 points to the index's 15.6% gain. However, the rest of the index is also performing well, aligning with expectations set earlier in the year.

From a cluster perspective, Citi says the Growth sector has led YTD index performance, while Cyclicals and Defensives also show strong YTD results but lag behind Mega Cap Growth. They also said a notable divergence exists between the performance of Large and Small Cap stocks.

Citi dismisses comparisons to the tech bubble, arguing that the fundamental circumstances today are markedly different. "Multiple expansion in the Growth cluster has been a large contributor to strong index performance," Citi analysts assert, emphasizing that PEG ratios indicate this expansion is accompanied by rising fundamental growth expectations.

The bank explains that valuations for the Mag 7 remain high by historical standards but are supported by significant earnings growth trajectories. The Mag 7 is expected to contribute $51.30 to the S&P 500's $244.70 EPS for 2024, adding $11 to the index's Y/Y EPS.

For the rest of the index, Citi says that while earnings estimates for 2024 have been trimmed, they still project a respectable EPS growth of 6.3% Y/Y. "Strong Mag 7 earnings growth and a persistent upward revision bias has kept index-level estimates resilient YTD," the analysts observe.

Looking ahead, Citi anticipates that sector-level inflections in late 2024 into 2025 will broaden earnings growth, setting a constructive yet complicated path for the market. Interestingly, Citi's projections are slightly more optimistic than the 2024 consensus but less so for 2025.