More gains ahead for US stocks?

The S and P 500 has staged a huge, roughly 25% rally since the start of the year. How much more upside should investors expect, and what could drive those gains?

The idea that the economy is growing suggests that if fair value is around the current level, then the forward trajectory of the index is gonna be driven by earnings as opposed to a valuation expansion.

I'm Alison Nathan, and this is Goldman Sachs Exchanges. Today, I'm sitting down with David Costin and Ryan Hammond from our US portfolio strategy team in Goldman Sachs Research. They recently boosted their year end and 12 month targets for the S and P 500. Let's find out why. David, Ryan, thanks for joining us. Thank

you, Alison. Thank you. So,

David, we've spoke to you earlier this year. The S and P has been on nothing but a tear minus a bit of a blip in August. But if we think about where we are today at new record highs again, you know, what have been the primary drivers of this rally, especially in recent months?

I think you can think about the rally, Allison, 2 ways. The first is it's been equally driven by earnings growth and valuation expansion. And that is different from calendar 2023 when it was almost about 75% of that return came from a increase in valuation. So the first part of it is earnings and valuation. The second is the largest stocks in the market that get all of the visibility often known by the term, Magnificent 7. Those stocks are up 36% this year. The typical stock is up around 17%. So in aggregate, as you pointed out, the index level is up around, 25% as we speak today, and that's d

And if we think about earnings, are they doing better than we expected coming into the year? Is this just a reflection of the strength of the economy, or what's driving that earnings growth, Ryan?

Yeah. An economy that's growing usually means earnings are growing, but part of the reason why we upgraded our s and p five 100 price targets was because of better earnings growth than we previously assumed. So, our previous forecast was for 6% earnings growth in 2025. We raised that to 11% earnings growth, both on the back of solid economic data, but also some micro factors related to semiconductors, these mega cap tech stocks that David mentioned, and some onetime charges that are affecting earnings in 2024.

So we're feeling pretty good about how companies are performing in terms of earnings. So when we think about this strong earnings growth that led us to upgrade our earnings forecast for this year, again, we talked about economic expansion being a key driver. You know, does that mean that, you know, the consumer is in a good shape? People are just buying more things. The economy is buoyant.