Upgrade to Wall Street forecasts fuels stock market rally

Bullish forecasts for Wall Street earnings have been revealed after a leading bank upped its view on US GDP and highlighted a “virtuous cycle” from AI investments.

Bank of America now sees S&P 500 earnings per share (EPS) of $250 in 2024, up 12% year-on-year and significantly better than its previous forecast of $235.

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The upgrade came as the S&P 500 index returned towards record territory in today’s session, despite a hotter-than-expected inflation reading of 3.2% appearing to deal another blow to hopes of a near-term cut in US interest rates.

The benchmark stood 0.9% higher at 5,163 by mid-afternoon, with semiconductor giant NVIDIA Corp (NASDAQ:NVDA) back among Wall Street’s top-performing stocks following a recent sell-off.

Bank of America recently raised its S&P 500 year-end target to 5,400, adding that sentiment is nowhere near the bullish levels of prior market peaks. It added: “In our view, the bull market has legs.”

The bank believes that comparing the price/earnings multiple of today to those of prior decades made little sense given the index's mix shift.

“Furthermore, companies have been forced to abandon low-quality EPS growth (levered buybacks, global cost/tax arbitrage) to focus on efficiency, yielding more predictable margins and warranting a higher multiple.”

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The bank’s new S&P 500 earnings estimate follows a strong fourth-quarter results season and an increase in its annual GDP forecast for this year to 2.7% from November’s 1.4% estimate.

The updated projection on economic activity translates to a five percentage point improvement in earnings growth. It has also launched its 2025 earnings forecast at $275.

The bank said: “2023 was a transition year for Corporate America, and companies have now adjusted to the new higher rate and tepid demand environment.”

The next leg of the earnings recovery will come from the top line, but the bank warns of a risk to its forecasts should weaker demand stall last year’s margin recovery. It also highlights the potential impact of tariffs in the event of a Donald Trump victory in the presidential election.

The bank highlights that “hyperscalers” Microsoft Corp (NASDAQ:MSFT), Amazon.com Inc (NASDAQ:AMZN), Alphabet Inc Class A (NASDAQ:GOOGL) and Meta Platforms Inc Class A (NASDAQ:META) are expected to spend $180 billion (£141 billion) on capital expenditure in 2024. This is a 27%, or $38 billion (£30 billion) year-on-year increase, representing about 80% of their expected earnings growth.

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History suggests companies in reinvestment cycles underperform but the bank sees a potential virtuous cycle forming from artificial intelligence investments.

It added: “Semiconductors and networking are the most obvious beneficiaries, but increased power usage and the physical build-out of data centres will lead to more demand for electrification, utilities, commodities.

“Productivity gains from AI and domestic investments are also a major tailwind.”

The bank’s optimistic US view is largely matched by the feedback received by UBS analysts following meetings with clients in Europe and North America.

The bank reported today: “Clients see earnings revisions stabilising (ie, getting less bad) and normally when markets make a new high (after a bear market), returns are positive 88% of the time over the next six months.”