As the summer draws to a close, the S&P 500 continues to surge, even breaking records with its valuation metrics. Looking ahead, one strategist is confident that the index will continue its upward trajectory.
In late July, the S&P 500’s price/earnings ratio reached a peak multiple of around 20, signaling the price investors are willing to pay for each dollar of company profit. Although the ratio has since dipped to 18.7, it remains significantly higher than its starting point earlier this year and the average of the past two decades, which stood at 16.8 and 15.76, respectively.
While high valuation multiples don’t automatically trigger a sell-off, they do raise concerns among investors about the sustainability of such levels, potentially leaving the market vulnerable to a downturn.
However, Manish Kabra, U.S. Equity Strategy Head at Société Générale, remains optimistic. He predicts that the S&P 500 will close out the year at 4750, reflecting a 6.5% gain from Tuesday’s market close of 4,461.90.
Currently holding steady around 4473 in Wednesday’s trading, the index has already experienced an approximate 16% increase since the beginning of the year. The driving forces behind these gains are the growing frenzy surrounding artificial intelligence and expectations for the Federal Reserve to conclude its rate-hiking cycle by December.
Kabra primarily bases his projection on the recalibration or delay of recession forecasts. A more positive economic outlook in the coming months would fuel investor confidence, even in the face of a potential slowdown in mid-2022.
Additionally, Kabra highlights the increased support from corporate investments in AI and manufacturing spending or reshoring, which are expected to contribute further to the strength of the market.
Furthermore, he notes that “stagflation in Europe and a disinflationary downturn in China” enhance the relative attractiveness of the S&P 500 compared to other markets. Kabra asserts that “the U.S. is where growth is,” emphasizing that the country has not yet reached the peak of its profit cycle.
In early August, Citigroup projected a year-end target of 4,600 for the S&P 500. Looking further ahead, the bank’s forecast for mid-2024 stands at 5000.
Overall, market experts and strategists foresee continued growth and opportunity for the S&P 500 in the coming months. While uncertainties persist, the prevailing sentiment remains positive.