The Capital Economics team was one of the most optimistic we found about the outlook for stocks in 2024.
The company expects the benchmark S&P 500 to rise to 5,500 points by the end of this year and gain another 1,000 points – about 18% – by the end of 2025, reaching 6,500 points in a little less than two years.
In a note released to clients on Wednesday, the firm's chief market economist John Higgins addressed the key pillars of this forecast as investors began the year with some concern.
Higgins' view essentially boils down to the argument that profits can continue to rise and the AI hype will ultimately inflate a stock market bubble.
Comparing today's market conditions to those prior to the tech bubble of the late '90s, Higgins notes, among other things, that while valuations for the market's technology leaders are high, there is also room for further appreciation in the basket of stocks and the market as a whole.
The easiest way to imagine rising valuations is that stock prices – or the amount investors pay for each dollar of earnings – are rising while actual earnings are not rising.
Source: Capital Economics
“Our current forecasts for the S&P 500 at the end of 2024 and the end of 2025 are 5,500 and 6,500, respectively,” Higgins wrote. “As meaningful as these forecasts may seem, the valuation of the index would only have to rise to approximately the level it reached before the dot-com bubble burst [realized] – based on what we believe to be plausible results for EPS.”
“Our analysis leads us to conclude that provided the economy avoids recession, there is scope for a bubble to inflate in the S&P 500 this year and next,” Higgins added.
“We expect the index to gain even more traction at the top, but expect most sectors to do well, although those that stand to benefit most from the advent of AI will continue to come out ahead .”
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