Stocks Keep Setting Records
The S&P 500 is on a powerful winning streak, setting nine record highs in May alone despite rising gasoline prices, weak consumer confidence and the highest inflation in nearly three years.
Wall Street analysts say the rally may still have room to run. Goldman Sachs raised its year-end target for the S&P 500 on Wednesday, projecting that the index could reach 8,000 points, about 6% above its current level.
Wall Street Looks Past Consumer Gloom
The contrast between market optimism and household pessimism has become increasingly clear. Many Americans remain discouraged by inflation and the broader economy, but investors are focusing on strong corporate profits and the potential productivity boost from artificial intelligence.
Jeff Buchbinder, chief equity strategist at LPL Financial, said the scale of recent earnings growth has been unusually strong. He said he has not seen anything like the current earnings environment in 25 years.
Corporate Profits Surge
Technology companies increased earnings by an average of 50% in the first quarter, far above the roughly 10% growth usually seen in that period, according to Buchbinder.
Even outside the technology sector, U.S. companies grew earnings by 20%, about double the typical pace. Businesses have benefited from lower tax rates and other breaks included in last year’s Republican tax and spending legislation.
Valuations Look Less Stretched
The strength in earnings has helped change how investors view the market’s valuation. Price-to-earnings ratios are often used to judge whether stocks are expensive or attractive.
Despite the S&P 500 reaching new highs, Goldman Sachs analysts said the index’s valuation multiple has actually fallen because expected earnings have risen faster than stock prices. The S&P 500 is up 10% year to date, while forward earnings-per-share estimates have climbed 15%.
AI Optimism Drives Demand
Artificial intelligence remains one of the biggest forces behind the rally. Investors are betting that AI will transform business productivity and reshape the global economy.
Some analysts warn that the surge in AI-linked stocks could resemble a bubble, drawing comparisons to the dot-com boom. But supporters argue that today’s AI leaders include profitable giants such as Microsoft and Google, along with fast-growing private companies like Anthropic.
Markets Bet The Iran War Will Ease
Investors are also looking beyond current geopolitical risks. Many expect the war involving the United States, Israel and Iran to move toward a resolution, which could reopen the Strait of Hormuz and ease global oil prices.
Tom Holland of Gavekal Research said any preliminary agreement between Washington and Tehran could push oil prices lower, bring bond yields down and support further stock gains.
Lower Oil Would Support The Rally
If more ships begin moving through the Strait of Hormuz after a deal, markets could further reduce the risk of an inflationary shock.
Buchbinder said a market environment with lower oil prices, falling interest rates, no recession and above-average earnings growth would be a strong setup for further gains in equities.
Risks Still Remain
The bullish outlook is not without danger. A prolonged Iran war could push energy prices higher again, keeping inflation elevated and hurting household spending.
AI companies also face pressure to meet very high earnings expectations. If they fail to deliver, the same enthusiasm that helped drive stocks higher could quickly turn into disappointment.
Bond Yields Are A Key Threat
Investors are also watching Treasury yields closely. Persistent inflation could prevent the Federal Reserve from cutting interest rates, while higher bond yields could limit further upside for stocks.
Anthony Saglimbene, chief market strategist at Ameriprise, said the market’s next move may depend on whether rates stabilize and whether incoming economic data show that growth can continue without reigniting inflation.
