It’s been quite a ride- and it ain’t over yet as the Analyst Revamps S&P 500 target before Nvidia earnings
The S&P 500 has surprised analysts this year as the index, which includes roughly 80% of the total market capitalization of U.S. public companies, keeps surging.
On Feb. 9, the S&P 500, which jumped 24% in 2023, closed above 5,000 for the first time, boosted by positive inflation data.
Adam Turnquist, chief technical strategist for LPL Financial, noted that outside of a potential sentiment boost, “round numbers such as 5,000 often provide a psychological area of support or resistance for the market.”
“Researchers always refer to them as ‘Cognitive Shortcuts’ that create a round-number bias,” he said. The index hit 1,000 on February 2, 1998, and then reached 4,000 on April 1, 2021. Then, on January 19 of this year, the S&P 500 index closed at a record high of 4839.81, surpassing its previous record two years earlier.
The S&P 500 reached another record-high close on Feb. 15, settling at 5,029.73. Key to the S&P 500’s success is the so-called Magnificent 7, a group of high-performing and influential companies that includes such tech titans as Microsoft, Meta Platforms, and Amazon.
And let’s not forget Nvidia, the semiconductor company that has taken off like a Roman candle in the wake of the artificial intelligence boom.
The company, which has a market cap of roughly $1.7 trillion, is scheduled to report fourth-quarter earnings after the bell on Feb. 21, with Wall Street expecting earnings of $4.60 on revenue of $20.5 billion.
A year ago, Nvidia posted earnings of 88 cents a share on revenue of $6 billion.
Analysts revealed a host of price target changes heading into the AI chip maker’s crucial earnings report.
“The AI Revolution starts with Nvidia, and in our view, the AI party is just getting started,” Wedbush Dan Ives said. “Nvidia’s earnings are key for the tech world and broader markets.”
Nvidia and its Magnificent 7 peers, Microsoft, Meta Platforms, and Amazon, have contributed around 75% of the S&P 500’s total return.
At the company level, Nvidia is the largest contributor to earnings growth for the S&P 500’s Information Technology sector in Q4. If the Santa Clara, Calif. company were excluded, the year-over-year earnings growth rate for the sector would drop to 11.5% from 20.8%, according to FactSet.
The Goldman Sachs equity team raised its price target for the S&P 500 and for earnings this year and next due in large part to the mega caps earnings strength.
The team lifted its S&P 500 price target just slightly above current levels to 5,200.
“In December, we lifted our target from 4,700 to 5,100 to reflect an outlook for more dovish policy, lower real interest rates, and higher valuations than we had originally expected,” said Chief U.S. Equity Strategist David Kostin. “Our target upgrade today reflects an improved earnings outlook.”
Kostin also said that the fourth-quarter earnings season also highlighted the ongoing fundamental strength of the mega-cap Magnificent 7.
Analyst notes strong Magnificent 7 financials
“If Nvidia reports estimates in line with consensus, the Magnificent 7 will have grown sales by 15% year-over-year and lifted margins by 582 basis points year-over-year, leading to earnings growth of 58%,”Kostin said.
If Nvidia delivers on estimates, it would represent growth of 597% and 242%, respectively.”
In contrast, the remaining 493 stocks in the S&P 500 grew sales by 3% year-over-year while margins contracted by 56 bp and earnings fell by 2%.”
Energy weakness is largely responsible for the 2% decline. Nevertheless, according to Kostin, median EPS growth was just 6% year-over-year in 4Q.
“The fundamental strength of the mega-cap stocks should also boost aggregate S&P 500 profits in 2024,” Kostin said. “The strength of the Magnificent 7’s results has caused analysts to lift their expectations for 2024.”
During the past 3 months, Kostin said, Magnificent 7 earnings estimates have been revised upwards by 7%, and margins have been revised upwards by 86 bp.
This compares with a 3% downward revision to earnings and 30 bp downward revision to margins for the remaining 493 stocks, he added.
The Magnificent 7 accounted for 11% of total 2023 S&P 500 sales and 18% of earnings, and consensus expects the stocks to grow EPS by 20% in 2024.
“We expect the Information Technology and Communication Services – which contain 5 of the Magnificent 7 stocks – will post the strongest earnings growth among S&P 500 sectors in 2024,” Kostin said.
He said that he expected demand drivers, including AI growth and consumer strength, would support revenue growth in these sectors, while margins would continue to expand as these companies focused on operating efficiency.”
“The rest of the S&P 500 should also improve margins in 2024, but to a much smaller degree,”Kostin said.
According to FactSet, four companies, led by Nvidia, are expected to deliver year-over-year earnings growth of 79.7% for Q1 2024.
Goldman Sachs’ new S&P 500 target reflects an S&P 500 EPS forecast of $241 in 2024, up from $237, and $256 in 2025, up from $250.
Given its weight in the index and significant earnings growth, whether those figures need to be adjusted may depend on what Nvidia says during Wednesday’s conference call.
