Investment banking giant Goldman Sachs has recently raised the S&P 500 index's end-of -year target to 5,600 points. This is mainly due to robust earnings advancements seen by some of the biggest tech companies on the US stock market, as well as increased price-to-earnings ratios.
The S&P 500 closed at 5,431.60 points on Friday evening.
The biggest tech companies driving this growth are Nvidia, Microsoft, Amazon, Google and Meta Platforms, which now make up approximately 25% of the S&P 500's value. Along with Tesla and Apple, these groups make up the Magnificent Seven tech stocks.
In a note sent out on Friday evening, Goldman Sachs said, as reported by Reuters: "The drivers of the rally include upward revisions to consensus 2024 earnings estimates for these same tech companies, and valuation expansion stemming from increased investor enthusiasm about artificial intelligence (AI)."
The solid earnings are expected to continue for the rest of the year, with real yields expected to remain the same.
Is Big Tech enough to support the S&P 500 down the line?
Although Big Tech companies are carrying the lion's share of growth at the moment, investors are also speculating that, in order for the S&P 500 to see long-term sustained growth, other sectors may also have to step up.
This is due potentially to high expectations being put on tech stocks, which may not all be able to grow at the same pace. For example, companies like Nvidia have seen immense growth due to their artificial intelligence business, however, Microsoft has been struggling with increased competition and regulatory scrutiny.
Apple has also been facing reduced sales in key markets such as China, as higher inflation and interest rates has caused consumers to pull back from perceived luxury purchases. Similarly, other Magnificent Seven tech stocks, such as Tesla, have had to compete fiercely for their place with Chinese automobile producers.
Regarding the Big Tech stocks, Michael Casper, an equity strategist at Bloomberg Intelligence said, as reported by Financial Post: "The fundamental business lines of each of these companies aren't moving in the same direction anymore, like during the recovery from the pandemic, so that's also causing a profit cooldown.
"The Magnificent Seven stocks no longer move as one ubiquitous block, and that hurts its earnings potential as a cohort, because the trade has now broken up."
Sectors such as materials, energy, healthcare, financials and industrials are looking up and could potentially be poised to take a greater share of the market in the coming days. Cyclical industries such as tourism and hospitality are also seeing increased interest, especially through a surging rebound in post-covid demand.
There is a perception by some analysts that tech stocks are approaching, or have already reached, maturity and stagnation, Big Tech stocks, especially, have soared over the past few years. Other sectors still have fast-growing companies, especially in emerging markets, which are considered to have yet to reach full potential.
