HSBC Raises S&P 500 Year-End Target to 5,900

HSBC has raised its year-end price target for the S&P 500 to 5,900, indicating that the index is currently reflecting a ‘Goldilocks scenario.’ This scenario is defined by:
– Above-trend GDP growth
– Easing inflation
– Lower interest rates

“At the start of the year, we discussed that for a Goldilocks bull case scenario to unfold, both macroeconomic and microeconomic indicators had to fall into place including:
– Above-trend GDP growth to support earnings
– Subdued inflation to facilitate Federal Reserve easing,” said HSBC strategists. “And that has happened.”

This macroeconomic climate is expected to particularly benefit non-tech and non-Magnificent 7 stocks, which tend to respond favorably to rate cuts and a strengthening economy. These stocks experienced a 9% earnings increase in the second quarter, with potential for sustained growth or better in the latter half of 2024.

“The pieces are falling into place for a bull case scenario,” they remarked.

HSBC’s updated target of 5,900 exceeds their initial bull case scenario, benefiting from clearer visibility on corporate earnings, economic growth, and rates. The bank anticipates a 13% earnings per share (EPS) growth for 2024, expecting accelerated growth in the latter half as economic indicators stay strong, company guidance is optimistic, and third-quarter earnings beat expectations.

Additionally, they predict that valuations will remain at premium levels, supported by strong profit margins and return on equity (ROE) in the US market, alongside a forecast for lower Treasury yields.

With respect to monetary policy, HSBC anticipates a gradual easing, projecting six consecutive 25 basis point rate cuts, targeting a range of 3.25-3.50%.

However, possible risks such as US elections or geopolitical tensions might bring volatility, creating “buying opportunities,” the strategists warned. Historically, the S&P 500 has typically increased by 3% into year-end after elections; however, contested or delayed results could lead to varying performance. Currently, the S&P 500 is trading at record highs, boasting a year-to-date gain of over 20%, with valuations—excluding the pandemic period—at their highest since the dot-com bubble.