monday Feb 19 2024 14:01
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In anticipation of the much-awaited Nvidia earnings report this week, Goldman Sachs has upgraded its end-of-year forecast for the S&P 500 index to 5,200, largely contingent on the continued profitability of major technology companies.
In a note cited by MarketWatch, a team led by David Kostin, Goldman’s chief U.S. equity strategist, wrote late on Friday:
“Our upgraded 2024 EPS forecast of $241 (8% growth) stands above the median top-down strategist forecast of $235 (6% growth) and reflects our expectation for stronger economic growth and higher profits for the Information Technology and Communication Services sectors, which contain 5 of the ‘Magnificent 7’ stocks”.
Goldman's revised target aligns it with some of the most optimistic projections on Wall Street, including those of Oppenheimer's John Stoltzfus and Fundstrat's Tom Lee, who both foresee the S&P 500 reaching 5,200, having accurately predicted the rally in 2023. Ed Yardeni of Yardeni Research leads Wall Street’s S&P 500 forecasts with a year-end prediction of 5,400.
This adjustment marks Goldman's second increase in its S&P 500 forecast, following an earlier revision to 5,100 from 4,700 in late December. Earlier in the year, RBC Capital raised its S&P 500 estimate to 5,150 from 5,000, while UBS upped its target to 5,150 from 4,850.
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Goldman's optimistic revision is based on a brighter economic outlook, with its economists recently upgrading their forecast for real U.S. GDP growth in the fourth quarter of 2024 to 2.4%, propelled by robust consumer spending and residential investment. They anticipate an S&P 500 forward price-to-earnings multiple of 19.5 — slightly below the current level of 20.
“The nearly-completed 4Q earnings season highlighted the ability of corporates to sustain profit margins despite slowing inflation,” said Kostin and his team.
However, the bank's positive forecast is also heavily reliant on the sustained success of major technology firms. Goldman's team, led by Kostin, has highlighted the "ongoing fundamental strength" demonstrated by the Magnificent 7 tech firms: Meta Platforms, Microsoft, Apple, Google-parent Alphabet, Tesla, Netflix, and Nvidia.
The upcoming Nvidia earnings report, set for Wednesday, is seen as a critical juncture for the market, which could mark a “make or break” moment for stocks. Expectations are set for an earnings per share (EPS) reading of $4.59 — a potential surge of over 700% from the previous year.
MarketWatch quoted Deutsche Bank strategist Jim Reid as saying to clients on Monday:
“It’s a reflection of the world we live in that the most important event of the week may be Nvidia’s earnings on Wednesday. It is now the 4th largest company in the world and the best performer in the S&P 500 so far this year (+46.6% YTD), so this will be very important for sentiment.”
Goldman strategists have pointed out that if Nvidia's earnings meet projections, “the Magnificent 7 will have grown sales by 15% year/year and lifted margins by 582 basis points year/year, leading to earnings growth of 58%.”
The bank projects that the Information Technology and Communication Services sector, which includes five members of the "Magnificent 7" — Meta, Microsoft, Apple, Alphabet, and Nvidia — will see the highest earnings growth within the S&P 500 this year. The rest of the index is expected to see modest gains, albeit to "a much smaller degree,” the Goldman analysts said.
Goldman also noted that the robust performance of major tech companies has led to increased projections by other firms, with earnings estimates for the "Magnificent 7" being adjusted upwards by 7% over the last three months, and their margin forecasts improved by 86 basis points. As for the remaining 493 stocks in the S&P 500 index, their earnings and margins forecasts have been revised downwards by 3% and 30 basis points respectively.
The bank acknowledged that better-than-expected U.S. economic growth or further positive surprises from Big Tech could present additional upward potential for their projections.
“Likewise, disappointing growth in the macroeconomy or from the largest stocks would create downside risk to our S&P 500 earnings forecasts. In addition, an acceleration in input cost inflation would diminish the outlook for the nascent profit margin rebound and therefore for broad corporate earnings growth,” said Kostin and his team.
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