Is S&P 500 Racing Toward 6,000 Mark? ETFs in Focus
U.S. stocks have been hovering near record highs, reflecting continued bullishness in 2024. The S&P 500 notched its 30th record close this year, buoyed by the tech rally, followed by consumer discretionary stocks. The Nasdaq Composite rose 1.1% on Jun 17, following its fifth consecutive record close.
Tech-Led Rally Boosts Forecasts
Wall Street analysts have revised their year-end targets for the S&P 500 upward, fueled by a strong tech-driven rally. Evercore ISI increased its target to 6,000, while Goldman Sachs raised theirs to 5,600, as quoted on Yahoo Finance. Last week, the S&P 500 surpassed the 5,400-mark for the first time.
Election Year Favorable for S&P 500?
Presidential election years have a long track-record of success. In the past 70 years of the S&P 500, the election year has delivered the second-best performance among the four in the presidential tenure. Average return on election year is 7.4% with a probability of 83% while the best returns (11% on average) comes on the Pre-Election Year with a probability of 88% (read: What Does the Year-End Election Hold for ETFs?).
High Valuations Not a Concern?
Despite concerns over high valuations, with the S&P 500 trading above 20 times forward earnings, analysts suggest that valuations can remain elevated for extended periods. Julian Emanuel of Evercore ISI noted historical precedents where markets remained at similar levels for hundreds of days.
During the Covid-19 reopening trade in 2021, the S&P 500 traded at similar valuation levels for 614 days. During the dot-com boom, the S&P 500 lasted at those levels for 737 days, per Emanuel, as quoted on Yahoo. This indicates that high valuations do not necessarily indicate imminent downturns.
At Least One Rate Cut in the Cards?
Federal Reserve Bank officials hinted at potential rate cuts later in the year, citing improving economic data. Philadelphia Fed President Patrick Harker indicated willingness to a rate cut if economic indicators continue to strengthen, while Minneapolis Fed President Neel Kashkari suggested December as a possible timing.
Traders now see a nearly 56.7% chance of a September rate reduction, according to the CME's FedWatch tool, compared with 45.1% one week ago. However, the rate cut by December is almost certain. There is only a 6.3% chance of rates remaining in the current range, down from 12.9% recorded last week. There is 43.6% probability of rates diving by 50 bps in December, up from 35.6% recorded a week ago.
Earnings Growth Driving Market
Entering 2024, bullish strategists emphasized the importance of a corporate earnings rebound for the market rally, which has materialized with a 6% growth in the first quarter—the highest in nearly two years. Tech earnings have driven most of this growth. However, strategists believe the earnings growth is broadening to other sectors like Utilities and Energy.
More Gains Ahead?
Although the S&P 500 entered the "expensive" territory in late January, it has gained only 15% so far this year, well below more than 40% returns seen when valuations were stretched during the post-pandemic rally and the 63% return seen during the dot-com bubble. With a resilient economy, chances of Fed rate cut and the AI-led tech rally, the S&P 500 road ahead doesn’t look bumpy at all.
ETFs to Gain
Against this backdrop, below we highlight a few ETFs that can be played in the current scenario. These ETFs include Vanguard S&P 500 ETF VOO, Invesco S&P 500 Equal Weight ETF RSP, iShares Core S&P 500 ETF IVV and SPDR S&P 500 ETF SPY.
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SPDR S&P 500 ETF (SPY): ETF Research Reports
Vanguard S&P 500 ETF (VOO): ETF Research Reports
Invesco S&P 500 Equal Weight ETF (RSP): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports