S&P 500 target raised to 5500+ at Wells Fargo on strong earnings growth

The S&P 500 is likely to continue grinding higher, according to the latest report from the investment banking giant Wells Fargo.

Wells Fargo’s team of strategists lifted the price target on the S&P 500 to 5535 from the prior 4625 as they hiked their 2025 earnings estimate to $270 and the index being valued at 20.5x earnings. The new price target implies an upside potential of more than 6% compared to Friday's closing price.

Wells Fargo: S&P 500 bull run can continue

Wells Fargo’s equity strategists argue that the ongoing bull market, which is fueled by artificial intelligence's secular growth and concentrated index holdings, has led investors to prioritize growth and discounting metrics over traditional valuation measures.

This shift has been marked by an increased willingness to embrace lower valuation thresholds and extend investment time horizons, driven by secular optimism.

“We reduced our equity risk premium to zero more than a year ago, and now the focus shifts out to 2025,” the strategists said.

Wells Fargo also highlights a potential increase in systemic risk facilitated by current monetary policies promoting risk and leverage. However, they don't foresee an immediate peak in systemic risk, suggesting aggressive valuations and extended time horizons are justified until specific thresholds are met, including wider investment-grade credit spreads, inflation adjustments, or a sustained increase in the 10-year U.S. Treasury yield.

“To some degree, we believe a moderation of Fed expectations is helping not hurting the SPX's performance, as it maintains the status quo which is constructive for large caps, the Growth/ secular AI trade, and Momentum.”

Looking ahead, the bank suggests a potential "melt-up" in the latter half of 2024, spurred by favorable political developments and a multi-year easing cycle encouraging risk-taking.

“We believe equities do have some upside from current levels, but we still anticipate a volatility spike in 1H24,” the report noted.

Investment strategies should balance growth opportunities, particularly in the Communications sector, with the defensive stability offered by Health Care and Utilities sectors.

Along these lines, Wells Fargo particularly sees midcap Growth as offering the best risk/reward scenario, given its valuation, technicals, and solid fundamentals.