The S&P 500 index has soared 45% over the past two years, and a debate is heating up: Will the party roll on or is it time for a significant pullback?
Bulls see the Federal Reserve trimming interest rates, perhaps twice this year. That could lift the economy and corporate earnings along with it.
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Falling inflation will allow the Fed to move, they say. Consumer prices increased 3.4% in the 12 months through May, the lowest tally in more than three years.
Bulls note that earnings already are on the upswing. Profits per share for the S&P 500 grew 5.9% in the first quarter from a year earlier, according to FactSet.
Analysts forecast an 8.8% increase for the current quarter. If that turns out accurate, it would constitute the biggest gain since Q1 2022.
The bear case for the stock market
But bears say that projection is too high and the market’s surge has gone too far.
As of July 3, the forward price-earnings multiple for the S&P 500 was 21.2 times, well above the five-year average of 19.3 and the 10-year average of 17.9, according to FactSet. (“Forward” means the multiple is calculated with analysts’ estimates of earnings for the next 12 months.)
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Bears also expect the Fed to leave interest rates “higher for longer.” The latest forecast by Fed officials offered a median estimate of only one rate cut for this year.
And inflation remains sticky, the bears say. The personal consumption expenditures price index, which is the central bank’s favored inflation indicator, registered 2.6% in the 12 months through May. That’s down from 2.7% in April but still well above the Fed’s target of 2%.
TheStreet
Goldman Sachs suggests stock picks
If you are in the market for stocks, you might consider Goldman Sachs’s July roster of high conviction stocks.
These are “20 to 25 of what we believe to be our most differentiated fundamental buy ideas across our U.S. stock coverage,” Goldman analysts wrote in the latest monthly report detailing their picks.
They added three stocks to the list for July.
Fox Corp. (FOXA) which encompasses Fox Network, Fox Sports and Fox News.
Goldman has a 12-month price target of $42 for the stock, which closed Friday at $34.54, down 0.7% on the day.
“The U.S. media industry is in a state of transition, fueled by increasing competition in content and enabled by new distribution channels,” the Goldman report says.
“Against this backdrop, [Goldman] favors companies with deep competitive moats including Fox, whose sports and news-focused network portfolio is more resilient to cord-cutting pressures.”
Fox trades at a discount to peers when accounting for the underappreciated value of its strategic/unconsolidated assets, Goldman said.
Its estimate for Fox’s 2025 Ebitda (earnings before interest, taxes, depreciation and amortization) stands 12% above the Wall Street consensus.
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Snowflake (SNOW) a data management company.
Goldman has a 12-month price target of $220 for the stock, which closed Friday at $143.01 on Friday, up 0.1%.
Snowflake will benefit from the increasing use of data to enable the next phase of the artificial-intelligence revolution, Goldman said. That’s AI platforms and eventual applications.
Chief Executive Sridhar Ramaswamy’s strategy to accelerate product development will “increase velocity and customer consumption,” Goldman said.
That will “culminate in a rare combination of fast top-line growth (reaccelerating to over 30%) and high free-cash margins that Snowflake’s current valuation does not reflect.”
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Global-E Online (GLBE) which provides e-commerce platforms.
Goldman has a 12-month price target of $41 for the stock, which closed Friday at $35.90, down 0.2%.
The company offers “attractive exposure to some of the fastest growing segments of e-commerce: cross-border and direct-to-consumer,” Goldman said.
It sees organic growth accelerating for Global-E in the second half of this year and next year. That will stem from stabilization of the consumer sector and product enhancements to its Managed Markets (formerly Shopify Markets Pro) service, Goldman said
A “robust pipeline of new partnerships” also will help. Goldman's 2025 Ebitda estimate is 16% above the Wall Street consensus.
Other well-known stocks on the Goldman list include Amazon (AMZN) , Amgen (AMGN) , Citigroup (C) and Nvidia (NVDA) .
The author owns shares of Amazon and Amgen.
