We are increasing our S&P target to 6,000 from 5,750 based on increased confidence that the Fed will cut rates by September and on the broadening AI rally as companies such as AAPL outline how AI features are likely to fuel future growth.
Recent data confirm that inflation is declining, and the US economy is slowing. Core PCE is likely to decline from 2.8% to 2.6% Y/Y at the end of this month. New homes for sale have risen to a 9 month’s supply vs. a normal average of 6 months and a high of over 12 months during the GFC. Initial jobless claims, a critical leading indication of employment, have risen to 238k from a 100-week average of 219k. In addition, the most recent job report was mixed with the establishment survey showing strong growth of over 200k jobs, but the household survey showing a decline of 400k and a rise in unemployment to 4%. Finally, net imports are surging. which is a major drag on GDP growth, due to a strong US economy relative to the rest of the world and a strong US dollar. The April goods and services deficit increased $6 billion alone, and the 1st quarter GDP only increased 1.3% with net exports subtracting .9% from total growth. We forecast that this drag will widen through the rest of this year as the dollar strengthens due to Fed rate cuts lagging the rest of the world.
The slowing US economy is obvious to most market participants except for the Federal Reserve. This Fed has proven to be a terrible forecaster of inflation and the economy as evidenced by its “transitory” call on inflation even as PPI and most other leading indicators foreshadowed inflation rising to double digit rates. Consequently, this Fed is likely to be behind the curve and wait until the September meeting to cut rates despite the fact that the data support a cut in July.
We expect that global rate cuts will cause a surge in central bank driven liquidity of over $2 trillion dollars, which will cause the stock market rally to broaden out to include value/income stocks and propel the S&P to over 6,000 by year end. Our target represents a 21.6x multiple of 2025 consensus earnings of 277.5. This multiple is reasonable if the US 10-year declines to less than 3.5% and given higher expected earnings growth driven by AI implementation.
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