AI Enthusiasm Prompts Wall Street to Raise Stock Market Forecasts

The excitement surrounding artificial intelligence continues to impact Wall Street, with three major analysts recently upgrading their forecasts for the S&P 500. Investments in generative AI are showing early signs of driving earnings growth in large-cap tech companies.

Upgraded Forecasts

Evercore ISI:

• Analyst: Julian Emanuel

• New Target: 6,000 (up from 4,750)

• Reason: "AI revolution is in the early innings." Emanuel's target is the highest on Wall Street.

Goldman Sachs:

• Analyst: Goldman Sachs' Equity Strategy Team

• New Target: 5,600 (up from 5,200)

• Reason: Increasing earnings expectations for tech giants like Alphabet, Microsoft, Amazon, Meta, and Nvidia.

Goldman Sachs equity strategist Ben Snider explained to Yahoo Finance, "We underappreciated the degree to which those earnings would lift those few stocks and drive the rest of the market."

Citi:

• Analyst: Scott Chronert

• New Target: 5,600 (up from 5,100)

• Reason: The generative AI influence is a significant growth driver in the US equity market.

Market Impact

Over two-thirds of the S&P 500's nearly 15% gain this year is attributed to the "Magnificent Seven" stocks: Tesla, Apple, Alphabet, Microsoft, Amazon, Meta, and Nvidia, according to Citi.

Goldman's model suggests that if this "megacap exceptionalism" continues, the S&P 500 could end the year at 6,300, driven by continued revenue beats from these companies.

Barclays head US equity strategist Venu Krishna holds a 5,300 target but notes that tech outperformance could push the S&P 500 above 6,000 in a bull-case scenario. "We are in that environment," Krishna told Yahoo Finance.

Market Concentration Concerns

The top-heavy market, led by a few large-cap tech stocks, raises concerns about the rally being too narrow. However, strategists argue this isn't a reason for investors to worry. Snider highlighted that a narrow rally is a characteristic of the S&P 500, where a few companies performing well can lift the entire index.

Potential Risks

Despite the optimism, there are warnings about AI-driven stock valuations. JPMorgan chief market strategist Marko Kolanovic, who maintains a bearish year-end S&P 500 target of 4,200, cautioned that equity valuations are "rich" while sentiment is "near highs."

Evercore ISI's Emanuel noted that while the S&P 500 trading above 20 times its forward earnings estimates is "expensive," high valuations can persist for extended periods. Historically, the S&P 500 has traded at these levels for prolonged times, such as during the dot-com boom.

To see graphs of the stocks, please visit Yahoo’s web page.