Stocks have enjoyed quite a nice ascent in 2024, with the S&P 500 climbing 11.5% this year to 5,321.
That tops the average full-year gain of 10.3% going back to 1983, according to Moneychimp.
At the start of the year, stocks benefited from expectations of six interest-rate cuts by the Federal Reserve this year. But stubborn inflation and a resilient economy have dashed those expectations.
Now bullish investors are focusing on earnings. With 93% of S&P 500 companies having reported first-quarter earnings, a blend of their results and analyst forecasts for the remaining companies shows a profit increase of 5.7% from a year earlier, according to FactSet.
It that number holds, it would be the biggest gain in two years.
The artificial intelligence mania also has boosted stocks. For example, the stock of semiconductor titan Nvidia (NVDA) , the dominant maker of graphics-processing units for AI activity, has soared 92% this year.
Stocks have lofty valuations
But there are cracks in the market and valuation is one. As of May 17, the forward price-earnings multiple for the S&P 500 was 20.7, well above the five-year average of 19.2 and the 10-year average of 17.8, according to FactSet.
To be sure, bulls argue that adjusted for high interest rates, valuations really aren’t very high. Time will tell.
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Another dark cloud is the market’s reaction to weaker-than-expected earnings reports. S&P 500 companies that reported negative first-quarter earnings surprises have suffered an average stock-price decline of 2.8%.
That was from two days before the earnings release to two days afterward. The decline exceeds the five-year average of 2.3%.
Changes in analysts’ stock calls
The stock market’s recent power has led many strategists to increase their forecasts.
Deutsche Bank’s Binky Chadha raised his year-end estimate for the S&P 500 Friday to 5,500 from 5,100. That would represent a 3.4% climb from Monday’s level.
Strong economic and earnings growth could propel the move, he wrote in a commentary. He projects S&P 500 earnings-per-share growth of 13% for the year as a whole. And valuations are “full, not high,” Chadha said.
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Even Morgan Stanley’s Michael Wilson, one of the market’s last and most notable bears, has changed his tune. He now predicts the S&P will hit 5,400 in the second quarter of 2025.
That’s only 1.5% above Monday’s quote. But it’s a 20% jump from his previous forecast of 4,500 for the end of this year. Wilson didn’t offer a new prediction for that date.
“We forecast robust EPS growth alongside modest multiple compression,” Wilson wrote in a commentary Sunday cited by Bloomberg. Multiple compression results from a company’s earnings increasing more than its stock price.
Earnings will benefit from a “sunny macro environment," he said. To be sure, “macro[economic] outcomes have become increasingly hard to predict, as data have become more volatile," Wilson said. And that’s one reason he’s no raging bull.
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Another cautious strategist is Goldman Sachs’s David Kostin. He sees the S&P 500 ending the year at 5,200, down 2.3% from Friday’s quote.
Kostin is worried about valuations. Investors now assume an economic growth rate faster than the current 3% pace, he said.
A warning: Don’t get too wrapped up in any one forecast. Wall Street strategists are notorious for getting their estimates wrong. Their thoughts often reflect more on what has happened than what will happen.
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