Goldman says S&P 500 could hit 6000 if mega-cap strength persists

The S&P 500 has surged so far in 2024, and after reaching Goldman Sachs' year-end target of 5200 last week, the firm said the index could continue to rally as mega-cap stocks continue to demonstrate their strength.

S&P 500 strength on AI optimism

The S&P 500 has demonstrated strength so far this year, with the tech sector leading the way. Despite concerns over sticky inflation and interest rates potentially remaining high, the index has surged 10% in the year-to-date, rising to an all-time high.

This rally was predominantly fueled by the stellar performance of tech stocks, particularly those benefiting from artificial intelligence (AI) demand.

The tech sector's robust performance has been a driving force behind the S&P 500's upward trajectory. This sector's ability to generate returns based on the potential for future profits from new technologies has reinforced the perspective that tech stocks are the way forward for many investors.

Of course, within tech, AI has been one of the primary contributors to the rally, with AI "picks and shovels" companies such as Nvidia (NASDAQ:NVDA) making tremendous gains. As a result, the market's AI-driven rally has been a significant factor in the S&P 500's recent success.

Goldman sees more upside on mega cap strength

In a recent note to clients, analysts at investment bank Goldman Sachs said that under their baseline forecast, EPS will rise by 8% in 2024 and 6% in 2025 "while the aggregate index forward P/E multiple contracts by 8% to 19.5x (83rd percentile) at year-end from its current level of 21.1x (89th %-ile)."

In the note, the firm explored four scenarios: "(1) in a 'catch up,' the S&P 500 would end the year at 5800 (+11% from today), (2) in a 'catch-down,' the S&P 500 would fall to 4500 (-14%), (3) continued mega-cap exceptionalism would lift the index to 6000 (+15%), and (4) recession fears would push the index down to 4500 (-14%)."

While the firm said that in its baseline forecast, the S&P 500 index will end the year roughly unchanged at 5200, -1% from today, they added that "in a scenario of continued mega-cap exceptionalism, the S&P 500 index would end the year at 6000 (+15%)."

"We previously argued that the current growth stock rally is different from the 2021 and Tech Bubble experiences because investors today focus on profitability," said the bank. "In addition, although AI optimism appears high, long-term growth expectations and valuations for the largest TMT stocks are still far from 'bubble' territory."

They added, "The cap-weight S&P 500 index traded at a greater than 100% valuation premium to the equal-weight index during the Tech Bubble and at ax30% premium in 2021."

The firm also noted that takeaways from NVDA’s GTC were encouraging and pointed to conditions of strong demand and constrained supply.

"Assuming a 16x NTM P/E for the equal-weight index and a 45% P/E premium for the market-cap index, the aggregate S&P 500 would trade at a forward P/E of 23x, 10% above today," Goldman Sachs concluded.