Wall Street’s new top S&P target is 6,000. Here’s why.

Wall Street’s new top S&P target is 6,000. Here’s why.

The new week starts with the S&P 500 looking to register its 30th record closing high of the year. And the optimistic market calls keep on coming.

Standing out is Julian Emanuel, strategist at Evercore ISI, who has pushed his S&P 500 end-of-year target up from a relatively bearish 4,750 to 6,000, a level that makes him the most bullish on Wall Street.

In a note that published over the weekend, Emanuel argues that a robust economic backdrop has joined with the sentiment boost from AI adoption, and that will lift corporate earnings and the multiples investors are willing to apply to them.

The COVID pandemic “changed everything”, he says. There has been record government stimulus, while elevated household cash balances and low leverage means the consumer has not been badly affected by the Federal Reserve’s campaign of interest rate hikes, he notes.

Indeed, with record stock markets and lofty house prices, consumer net worth has never been higher, says Emanuel.

Add to this a Federal Reserve that is minded to start cutting borrowing costs, and the stock market has a Goldilocks economic underpinning.

Read: There’s an unbalanced economy of have and have-nots. Here’s how investors should approach that, says Morgan Stanley.

Consequently, Emanuel predicts S&P 500 earnings per share will rise 8% in 2024 to $238 and increase 5% in 2025 to $251.

But to get to the 6,000 S&P 500 target for 2024 requires a trailing earnings multiple of 25 times. That’s extended on an historic basis and Emanuel therefore admits his target is premised on rising valuations.

“High multiples could continue to be supported given companies’ better- than-expected ability to manage costs and pass through inflation to consumers,” says Emanuel. “Net profit margins continue to hover near generational highs, even as inflation and wage growth stoked the biggest cost pressures since the 1970s. Profitability is strong.”

Another reason the market can support higher multiples is what Emanuel terms “the persistence of exuberance,” related, in the main, to AI. After Fed Chair Alan Greenspan in 1996 warned of irrational exuberance in the market linked to the internet and PC boom, the rally continued for more than three years, he notes.

In other words it’s possible for the stock market excitement around new technology to last much longer than worrywarts think.

“[W]hile valuations today echo their dot.com and pandemic extremes, high valuations can remain elevated for an extended period of time,” says Emanuel.

Importantly, the market is yet to see sharp rises in traders’ margin debt and very ebullient investor surveys, suggesting true exuberance has yet to arrive. “At present there is momentum (momo) without fear of missing out (FOMO). That could change,” says Emanuel.

Indeed, if the market truly starts pricing in the initial stages of an AI bubble — of the kind seen in the run-up to the year 2000 — then the multiple applied to earnings could rise to around 27, giving a “bull case” end of 2024 target of 6,500. Such multiple expansion may also be propelled by the Fed cutting rates into a still-strong economy.

However, there is a chance that AI excitement suddenly fades and investors begin eyeing big tech valuations more critically. This bear-case scenario may see the S&P 500 back to 4,750 by the end of this year.

But Emanuel stresses that any such pullback may be a buying opportunity. He cites the 25% plunge in Apple stock in autumn 1999, when the split adjusted share price dropped to $0.532. Yes, less than a buck.

Markets

U.S. stock-index futures are mildly mixed as benchmark Treasury yields nudge higher. The dollar index is little changed, while oil prices dip and gold is trading around $2,320 an ounce.

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The buzz

U.S. economic data due on Monday include the Empire State manufacturing survey for June at 8:30 a.m.

John Williams, president of the New York Fed, will talk at the Economic Club of New York at 12 noon, Philadelphia Fed President Patrick Harker will deliver a speech on the economic outlook at 1 p.m., and Fed Governor Lisa Cook will make comments at the 2024 Marshall Forum at 9 p.m.

It’s a “reasonable prediction” that the Federal Reserve will wait until December to cut interest rates, Minneapolis Fed President Neel Kashkari said on Sunday.

Companies reporting results on Monday include Lennar and La-Z-Boy after the closing bell.

The Shanghai Composite fell 0.55% as Chinese property stocks fell after the latest home sales data pointed to continued weakness in the country’s real estate sector.

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The chart

Evidence of market bifurcation keeps coming thick and fast. The charts below, provided by BTIG’s technical guru Jonathan Krinsky, show the performance of the S&P 500 index — dominated by big tech — and its equal-weighted sibling (SPW), along with their 14-day relative strength indices.

As Krinksy notes, the divergence of the RSI momentum gauges is stark: “Since we have data back to 1990, there had never been a day when SPX’s RSI closed above 70 the same day the SPW’s closed below 50.”

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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