With Strong Tech Earnings Ahead, Barclays Raises Its S&P 500 Target to 5,600

Strong earnings from major technology companies are expected to counterbalance declines in other market sectors as the year progresses, according to Barclays.

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Strategist Venu Krishna has increased his 2024 S&P 500 target from 5,300 to 5,600, positioning him at the median among strategists in the CNBC Pro Market Strategist Survey.

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This new target suggests less than 1% upside from Monday’s close. The S&P 500 has already surged over 16% this year, reaching record highs and surpassing many Wall Street predictions.

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"Macro moderation is likely to be a headwind for ex-Tech EPS growth through the end of the year; we expect this to be offset by Big Tech continuing to surprise to the upside as it did in 1H," Krishna wrote in a note.

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Investors have flocked to tech stocks this year, driven by expectations that artificial intelligence will boost corporate profits. The S&P 500 tech sector has risen 29% in 2024, with AI-related stocks like Nvidia and Super Micro Computer more than doubling in value.

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Despite recent pressure on tech stocks, as investors shifted their positions towards more cyclical market segments such as small-cap stocks, Krishna remains optimistic.

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"Recent US equity volatility should end up fairly contained," he said. "Major unwinds seem systematically/technically motivated rather than fundamental (crowded positioning among discretionary funds, systematic equity exposure was elevated, June-July rally was frothy/mostly multiple expansion, market implied probability of a September rate cut was already ~74% prior to June CPI)."

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There "could be more pain trade to go, but we see it as an opportunity to reset valuations as focus shifts to 2Q24 earnings."

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In addition to technology, Barclays has a positive outlook on the utilities sector, noting it is the only area outside of technology that is expected to generate above-S&P 500 EPS growth in FY24.

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Barclays has also set its 2025 S&P 500 target at 6,500, implying a 16.8% upside from Monday’s close.

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Krishna acknowledged the uncertainty surrounding next year’s estimates but said, "we expect most of the macro inputs to our EPS framework to be smaller (but still negative) headwinds for earnings growth next year."

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Barclays predicts that strong earnings from major technology companies will help mitigate declines from other market sectors, particularly as we approach the end of the year. Venu Krishna, a strategist at Barclays, has adjusted his S&P 500 target for 2024 to 5,600 from 5,300, reflecting a modest upside of less than 1% from the current levels. This forecast comes in the context of an S&P 500 that has already gained over 16% this year, setting new records and exceeding many expectations.

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Krishna points out that while macroeconomic moderation may hinder earnings growth outside the tech sector, the continued strong performance of Big Tech, as seen in the first half of the year, is expected to provide a compensating boost. This optimism is underpinned by the substantial investment in tech stocks this year, spurred by the anticipated positive impact of artificial intelligence on corporate profits. The tech sector of the S&P 500 has increased by 29% in 2024, with AI-related companies like Nvidia and Super Micro Computer seeing their stock prices more than double.

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Despite the recent pressure on tech stocks, due to investors rotating into more cyclical parts of the market like small-cap stocks, Krishna remains confident. He views the recent volatility in US equities as being driven more by technical factors than fundamental ones, citing crowded positioning among discretionary funds and elevated systematic equity exposure. He believes that any further downward pressure should be seen as an opportunity to reset valuations ahead of the focus shifting to second-quarter earnings in 2024.

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Barclays also favors the utilities sector moving forward, highlighting it as the only sector outside of technology expected to generate above-average EPS growth in FY24.

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Looking further ahead, Barclays has set a 2025 target for the S&P 500 at 6,500, suggesting a 16.8% increase from the current levels. While acknowledging the uncertainties surrounding next year’s estimates, Krishna anticipates that the macroeconomic factors impacting their EPS framework will be less severe but still pose challenges to earnings growth.

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In conclusion, Barclays maintains a positive outlook for the tech sector’s ability to drive market gains, even as other sectors face challenges. The firm’s updated targets for the S&P 500 reflect cautious optimism, grounded in the expectation that Big Tech will continue to deliver strong earnings performance, thereby supporting overall market growth.

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