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The Goldman Sachs equity team is boosting its price target for the broader market and for earnings this year and next, due in large part to the megacaps.
The team lifted its S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) price target just slightly above current levels to 5,200.
“In December, we lifted our target from 4700 to 5100 to reflect an outlook for more dovish policy, lower real interest rates, and higher valuations than we had originally expected,” strategist David Kostin said. “Our target upgrade today reflects an improved earnings outlook.”
Kostin raised the top-down S&P 500 EPS forecasts to $241 in 2024 and $256 in 2025, from $237 and $250.
“The 4Q earnings season also highlighted the ongoing fundamental strength of the mega-cap ‘Magnificent 7’ stocks: (AAPL), (AMZN), (GOOGL), (META), (MSFT), (NVDA), (TSLA),” Kostin said. “If NVDA reports estimates in line with consensus, the Magnificent 7 will have grown sales by 15% year/year and lifted margins by 582 bp year/year, leading to earnings growth of 58%.”
“In contrast, the remaining 493 stocks in the S&P 500 grew sales by 3% year/year while margins contracted by 56 bp and earnings fell by 2%.”
“This weakness was primarily driven by Energy (XLE) and understates the growth of the ‘typical’ S&P 500 stock; the median index constituent grew EPS by 6% y/y in 4Q,” he added.
“The fundamental strength of the mega-cap stocks should also boost aggregate S&P 500 profits in 2024,” Kostin said. “The strength of the Magnificent 7’s results has caused analysts to lift their expectations for 2024.”
“During the past 3 months, Magnificent 7 earnings estimates have been revised upwards by 7% and margins have been revised upwards by 86 bp. This compares with a 3% downward revision to earnings and 30 bp downward revision to margins for the remaining 493 stocks. The Magnificent 7 accounted for 11% of total 2023 S&P 500 sales and 18% of earnings, and consensus expects the stocks to grow EPS by 20% in 2024.”
“We expect the Information Technology (XLK) and Communication Services (XLC) – which contain 5 of the Magnificent 7 stocks – will post the strongest earnings growth among S&P 500 sectors in 2024,” Kostin said. “We expect demand drivers including AI growth and consumer strength will support revenue growth in these sectors, while margins will continue to expand as these companies focus on operating efficiency.”
“The rest of the S&P 500 should also improve margins in 2024, but to a much smaller degree.”