As Stocks Clinch New Records, 6,000 is 'Hardly a Stretch' for the S&P 500

The U.S. stock market is showing signs of significant “earnings momentum” over the next year, with the S&P 500 index potentially reaching a price target of 6,000 in 2024, according to research from DataTrek. This optimistic outlook follows the Federal Reserve’s recent shift to a rate-cutting cycle, which began last week, signaling more accommodative monetary policy ahead. According to Nicholas Colas, co-founder of DataTrek Research, this price target is not overly ambitious given the current state of the market and underlying economic factors.

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On Monday, the S&P 500 index, a key indicator of U.S. large-cap stocks, reached a new record high, closing at 5,718.57. This rise reflects strong market performance, with Colas emphasizing that the growth in the S&P 500 is not limited to just the technology and artificial intelligence sectors, which have dominated headlines. Instead, a broad range of industries are expected to contribute to the index’s earnings growth over the next year, particularly cyclical sectors such as energy, materials, and industrials.

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Wall Street analysts are predicting robust earnings growth for the S&P 500 in 2024, with earnings per share (EPS) projected to increase by 15.2%, compared to 10% growth this year. According to DataTrek, this anticipated growth is well-distributed across multiple sectors, suggesting that various industries are poised to perform well in the coming year. The forecast for strong earnings is bolstered by expectations of continued economic expansion, even as the Federal Reserve shifts into an "easing mode."

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With the Federal Reserve now lowering interest rates, the outlook for stocks appears favorable. Colas noted that the “path of least resistance” for stocks is likely upward, as rate cuts typically create a supportive environment for corporate earnings. In fact, Wall Street analysts estimate that the S&P 500’s EPS will rise to $258 over the next four quarters, representing a 12% increase from the previous year. This optimism around corporate earnings is helping to drive expectations for higher stock prices in 2024.

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However, the S&P 500’s current valuation is elevated by historical standards. The index is trading at 22.1 times forward 12-month earnings estimates, which is above its five-year average of 19.5 and its 10-year average of 18. While this multiple is slightly below the 2020 peak of 23.2, it still reflects a “rich” valuation, according to DataTrek. Despite this, Colas believes that the S&P 500 reaching 6,000 is a realistic goal, describing it as a “peak confidence” price target based on achievable earnings projections for the index.

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The S&P 500's recent performance has been boosted by the Federal Reserve’s interest-rate cuts. On Monday, the index gained modestly, surpassing its previous record high set on September 19, which occurred shortly after the Fed announced a substantial half-percentage-point rate cut. This marked the beginning of the central bank’s new rate-cutting cycle. According to John Madziyire, senior portfolio manager and head of U.S. Treasuries and TIPS at Vanguard, the probability of a “soft landing” for the U.S. economy has increased following the Fed’s decision. Inflation has been easing, and the economy has remained resilient despite earlier concerns about restrictive monetary policy.

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Madziyire explained that the Fed is now in the process of “recalibrating back to neutral,” meaning it is adjusting its benchmark interest rate to a level that neither stimulates nor slows the economy. Last week, the central bank lowered its target range for the federal funds rate to 4.75% to 5%. In Madziyire’s view, the so-called neutral rate could be closer to 3%, indicating further rate cuts may be on the horizon.

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Meanwhile, bond yields have declined this year, reflecting the broader trend of falling interest rates. On Monday, the yield on the 10-year Treasury note rose slightly to 3.74%, while the two-year Treasury yield remained relatively flat at 3.576%. Lower interest rates in the bond market are generally supportive of higher stock prices, as they reduce the cost of borrowing for companies and increase the appeal of equities relative to bonds.

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Given the combination of rising corporate earnings and falling interest rates, Colas argued that the S&P 500 reaching 6,000 is “hardly a stretch.” He noted that a rise to this level would represent a modest 5.2% gain from the index’s closing price on Friday. This upward trajectory seems achievable in the context of the current economic environment and the market’s earnings growth potential.

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The U.S. stock market as a whole enjoyed gains on Monday, with the S&P 500 closing 0.3% higher. The tech-heavy Nasdaq Composite and the Dow Jones Industrial Average each rose by 0.1%, according to Dow Jones Market Data. Additionally, the Dow reached a new all-time high, underscoring the broad strength of the market.

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In summary, the outlook for the U.S. stock market remains bright as earnings growth accelerates and interest rates fall. While the S&P 500’s valuation is elevated, its earnings potential over the next year suggests that a price target of 6,000 is within reach, driven by gains across multiple sectors and supported by an accommodating Federal Reserve.

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