The S&P 500 Defies Odds, Extends Rally With 6,000 in Sight

Key Points

• Despite the growing risks, the S&P 500 defies the odds and trends ever higher. 
• Earnings and capital returns support the rally and suggest a move to 6,000, which is possible by the end of the year. 
• The rally will likely continue in 2025 because the Fed is lowering interest rates. 

The S&P 500 NYSEARCA: SPY defies the odds and mounting risks to continue its trend. The market broke above critical support in late September and is on track to reach bull case targets near 6,000 by the year’s end. The move was sparked by the Fed, which leans toward lower interest rates but is driven by the robust outlook for earnings. With the two forces seemingly in tandem, the 6,000 level may only be a stopping point on the way to even higher highs. 

The S&P 500's 6,000 target is derived technically and is likely low. Given the earnings and dividend growth outlook and assuming no change in the price multiple, the 15% growth expected for 2025 suggests a move to 6,600 is possible by the end of next year. 

The S&P 500 Uptrend Is Supported by Earnings Growth 

The outlook for S&P 500 earnings growth is driving the market today. Although the forecasts for FQ3 2024, FQ4, and the first half of next year have moderated since the summer, they remain strong at 4.1%, 14.2%, and 13.5%, respectively. The critical detail is that the FQ3 growth target, down sequentially from low double-digits, is a launch pad for sequential acceleration in Q4 and sustained double-digit growth in the first half of next year. Because the Fed is lowering rates and economic data remains healthy, the estimates for next year are likely too low. 

The growth outlook for dividends and share repurchases also supports the uptrend in the S&P 500. Not all S&P 500 companies pay dividends or buy back shares, but most do, and some do both. The outlook is for sustained growth in 2025 at or above the pace set in 2024, mid-single-digits for the distribution and high-single-digits for repurchases. Goldman Sachs estimates predict that 2025 share repurchases will top $1 trillion, setting a record backed by earnings growth, lower interest rates, and resilient economic conditions. 

The economic data has shown spotty weaknesses in 2024 but healthy overall, aligning with Goldman’s forecast, with stronger-than-expected job growth and sustained wage inflation near 4.0%. A slowdown in GDP growth could provide a headwind for earnings growth, but the forecasted 2% to 2.5% is still solid and likely a low estimate. 

Large Cap Tech Is Still the Focus: That May Change in 2025

Large-cap tech stock prices will likely increase in 2024 and early 2025. Still, volatility should be expected because the VIX CBOE: VIX remains elevated, and there are signs of technical weakness. The warning to investors is not to chase stock prices higher but to wait for price pullbacks before buying, stick with quality, and be ready to exit quickly. 

Although the rally is expected to broaden to all sectors in 2025, including strength in healthcare, materials, communications, and technology, the focus will remain on large caps and AI. The communications and technology sectors will be the second and fourth fastest-growing, which means money will continue to flow into the leading names, including NVIDIA NASDAQ: NVDA, Microsoft NASDAQ: MSFT, Amazon NASDAQ: AMZN, Google NASDAQ: GOOG, and other AI-powered giants. 

Among the risks for investors is concentration. The S&P 500 is a market-cap-weighted index, so the more money flows into tech, the more impact it will have on the market when the AI bubble bursts. The top five holdings in the S&P, including Apple NASDAQ: AAPL, NVIDIA, Microsoft, and others mentioned, already account for 30% of the entire index, so the risk is real. Fed policy will eventually show up in the data and results, pointing to improving economic conditions and small-cap strength that could end the bull market for large-cap stocks.