Wall Street strategists are optimistic about stocks as the year comes to a close, citing strong earnings driven by artificial intelligence (AI) and favorable historical trends related to midterm election years, despite bond yields reaching 24-year highs. Truist's chief investment officer, Keith Lerner, stated, "The path of least resistance into year-end is higher." Analysts forecast a 30% year-over-year increase in S&P 500 (^GSPC) earnings, anticipating a potentially strong quarterly reporting season from major banks.
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Concerns about the AI sector, particularly regarding slower spending, have pressured tech valuations, with the Technology sector (XLK) currently trading at a price-to-earnings ratio of approximately 21—down from around 35 last year. Lerner mentioned a "reset in the market and valuations" that suggests the potential for upside before the year ends. Additionally, historical patterns favor a rally in the fourth quarter, as the S&P 500 has recorded positive returns about 84% of the time during midterm election years, averaging a gain of about 7%. The only significant exception was 2018, attributed to concerns over the Federal Reserve's rate hikes.
Despite this bullish outlook, strategists are also considering the implications of high interest rates. Last month, Yardeni Research lowered its year-end S&P 500 price target to 7,900, with this new target suggesting slightly over 1% potential upside from current levels. The market anticipates that the Federal Reserve will maintain interest rates at its October meeting, following a unanimous decision to raise rates by a quarter-point in September.
Recent market movements have been jittery, characterized by a narrowing breadth in the stock rally. On Friday, stocks rebounded following a Bloomberg report indicating that OpenAI (OPAI.PVT) expects to reach or exceed $70 billion in annualized revenue by the end of the year. Dan Ives of Yorkville Ives remarked, "Things are accelerating. So to me, these are buying opportunities, not the time to be skittish," emphasizing that the AI revolution is still in its early stages.
UBS analysts also noted the increase in AI demand, recommending a diversified investment approach. Ulrike Hoffmann-Burchardi, UBS's chief investment officer of the Americas, advised focusing on high-quality semiconductor and hardware companies benefiting from AI spending, in addition to major platforms and defensive tech firms.
Ines Ferre is a senior business reporter for Yahoo Finance.