Wall Street's Top S&P Target is 6,000 - Here's Why.

The new week begins with the S&P 500 poised to achieve its 30th record closing high of the year, buoyed by continued optimism in the market.

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A notable voice in this bullish sentiment is Julian Emanuel, a strategist at Evercore ISI, who has raised his year-end target for the S&P 500 from a previously cautious 4,750 to an ambitious 6,000, making him the most optimistic analyst on Wall Street.

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In a weekend note, Emanuel attributed this upgrade to a strong economic backdrop combined with a boost in sentiment from the adoption of artificial intelligence (AI), which he believes will enhance corporate earnings and the valuations investors are willing to pay. He pointed out that the COVID-19 pandemic significantly altered the economic landscape, leading to unprecedented government stimulus. Elevated household cash balances and low leverage have cushioned consumers from the impact of the Federal Reserve’s interest rate hikes. Consequently, consumer net worth is at an all-time high, supported by record stock markets and high home prices.

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Emanuel also highlighted that the Federal Reserve’s inclination to cut borrowing costs further supports a favorable market environment. He predicts S&P 500 earnings per share will increase by 8% in 2024 to $238 and by 5% in 2025 to $251.

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Achieving the 6,000 target for the S&P 500 in 2024 would require a trailing earnings multiple of 25 times, which is historically high. Emanuel acknowledges that this target is based on rising valuations, suggesting that companies’ ability to manage costs and pass through inflation to consumers could sustain these high multiples. He notes that net profit margins remain near generational highs despite significant cost pressures from inflation and wage growth.

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Emanuel also cites the "persistence of exuberance" around AI as a factor that could sustain high market valuations. Drawing a parallel to the late 1990s internet boom, he suggests that market enthusiasm for new technology can last longer than skeptics expect. Although current valuations resemble those seen during the dot-com and pandemic peaks, Emanuel believes they can remain elevated for an extended period.

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Importantly, he points out that the market has not yet experienced sharp increases in traders’ margin debt or overly exuberant investor surveys, indicating that true exuberance has yet to take hold. He suggests that the current market shows momentum without the fear of missing out (FOMO), but this could change. If the market starts pricing in the early stages of an AI bubble similar to the pre-2000 period, the multiple applied to earnings could rise to around 27, leading to a "bull case" target of 6,500 for the end of 2024. This scenario could be fueled by the Federal Reserve cutting rates in a still-strong economy.

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Conversely, if enthusiasm for AI wanes and investors become more critical of big tech valuations, the S&P 500 could fall back to 4,750 by the end of this year. Emanuel, however, views any such pullback as a buying opportunity, referencing the 25% drop in Apple stock in autumn 1999 as an example of how temporary declines can offer good entry points.

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As the week starts, U.S. stock-index futures are mixed, with benchmark Treasury yields slightly higher. The dollar index remains steady, while oil prices dip and gold trades around $2,320 an ounce.

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Market Highlights

John Williams, President of the New York Fed, will speak at the Economic Club of New York at noon, followed by Philadelphia Fed President Patrick Harker discussing the economic outlook at 1 p.m., and Fed Governor Lisa Cook making comments at the 2024 Marshall Forum at 9 p.m. On Sunday, Minneapolis Fed President Neel Kashkari suggested that it is likely the Federal Reserve will wait until December to cut interest rates.

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Lennar and La-Z-Boy are among the companies reporting results on Monday after the closing bell. Meanwhile, the Shanghai Composite fell 0.55% as Chinese property stocks declined following weak home sales data.

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Web Highlights

1. The U.S. has absorbed a third of global capital flows since COVID-19.
2. Wells Fargo’s bet on a flashy rent credit card is proving costly.
3. The Pentagon ran a secret anti-vax campaign to undermine China during the pandemic.

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Market Bifurcation Evidence

Charts from BTIG’s technical analyst Jonathan Krinsky highlight the divergence between the S&P 500 index, dominated by big tech, and its equal-weighted counterpart (SPW). The stark contrast in their 14-day relative strength indices (RSI) underscores this bifurcation. Krinsky notes that since 1990, there has never been a day when the S&P 500’s RSI closed above 70 while the SPW’s closed below 50, illustrating the current market disparity.

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