S&P 500 target lifted at HSBC as markets are pricing in a Goldilocks scenario

Investing.com -- HSBC has lifted its year-end price target for the S&P 500 to 5,900, noting that the index is now pricing in a ‘Goldilocks scenario,’ characterized by “above-trend GDP growth, easing inflation, and lower rates.”

“At the start of the year, we wrote that for a Goldilocks bull case scenario to play out, both macro and micro economic indicators need to fall into place, including above-trend GDP growth to support earnings and subdued inflation to allow the Fed to start easing,” HSBC strategists said. “And that has happened.”

Strategists expected that this macroeconomic environment would particularly benefit non-tech and non-Magnificent 7 stocks, which are more responsive to rate cuts and an improving economy. Their expectation was met, as these stocks saw earnings grow by 9% in the second quarter, with the potential for continued growth at this rate or higher in the second half of 2024.

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

HSBC’s new 5,900 target surpasses their original bull case scenario, thanks to improved visibility on corporate earnings, economic growth, and rates.

The bank projects a 13% earnings per share (EPS) growth for 2024, anticipating faster growth in the second half as economic indicators remain strong, company guidance remains positive, and third-quarter earnings outperform expectations.

Moreover, it sees valuations staying at premium levels, driven by “outsized profit margins and return on equities (ROEs)” in the US market, alongside the outlook for lower Treasury yields.

In terms of monetary policy, HSBC foresees a gradual easing, with six consecutive 25 basis point rate cuts, bringing the target range to 3.25-3.50%.

Meanwhile, potential risks, such as the US elections or geopolitical uncertainty, could introduce volatility and create “buying opportunities,” strategists highlighted.

Historically, the S&P 500 has tended to rise by 3% into year-end following elections, but contested or delayed results could lead to a more varied performance. The benchmark index is currently trading at record highs, with a year-to-date gain of over 20%, and valuations—excluding the pandemic period— at their highest levels since the dot-com bubble.

Source: Investing.com