The S&P 500 continues to enjoy a solid run as the improving macro environment, coupled with the AI optimism and recent stock upgrades, provides solid support for risk assets.
Last week, Goldman Sachs (NYSE:GS) increased its year-end forecast for the S&P 500 Index to 5,600, up from the previous target of 5,200.
This revision by one of the most important financial institutions is attributed to robust earnings growth from five major U.S. technology companies and a higher projected fair value price-to-earnings ratio multiple.
The tech giants Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Google (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META) have seen a combined surge of 45%, now representing 25% of the S&P 500’s equity capitalization.
Goldman points to upward adjustments in the 2024 earnings estimates for these tech companies and valuation increases driven by growing investor excitement around artificial intelligence. The broker anticipates that stable real yields by the end of the year and strong earnings performance will justify a 15x P/E ratio for the equal-weight S&P 500 Index.
However, the upcoming U.S. presidential election in November poses a significant risk to the S&P 500’s levels, as historically, index volatility has increased leading up to the election. Post-election, the trend typically reverses, with the index recovering to higher levels.
The news that Goldman lifted its target came as Evercore ISI also revised its year-end target for the S&P 500 on Sunday, setting it to Street-high 6,000, up from 4,750. The firm expects an 8% earnings growth in 2023, bolstered by the potential of the AI “revolution.”
As valuation models are refreshed to account for higher multiples, we look at 3 hottest stock upgrades from last week.
Nike (NKE)
Nike (NYSE:NKE) is a global leader in athletic footwear, apparel and equipment. Known for its innovative products and strong brand, Nike consistently delivers strong financial performance and growth potential, making it a solid investment choice.
Oppenheimer (NYSE:OPY) upgraded its rating for Nike, shifting from a neutral “Perform” stance to a more bullish “Outperform.” Alongside the stock upgrades, the firm also increased its price target for the sportswear giant’s shares from $110.00 to $120.00.
The stock upgrades come after a period when Nike faced a series of challenges that impacted its sales growth and profit margins. According to Oppenheimer, these difficulties included a mix of external and internal factors that have now been largely accounted for in the company’s current stock price and financial projections.
The firm’s analysis suggests that the current market valuation of Nike’s shares and the short-term financial expectations have become “derisked.” This term indicates that the risks previously associated with Nike’s performance are now reflected in its stock price, setting a stage for potential recovery.
Best Buy (BBY)
Best Buy (NYSE:BBY) is a leading retailer of electronics, appliances and tech services. With a broad product range and strong market presence, it attracts investors seeking exposure to consumer electronics and retail sectors.
Recently, UBS (NYSE:UBS) upgraded shares of Best Buy, moving the rating from “Neutral” to “Buy.” Accompanying the stock upgrades, the firm also increased the price target for the retailer’s stock to $106 from the previous $85. The stock upgrades come with a positive outlook from UBS on Best Buy’s potential performance over the next 18 months.
UBS identified several factors that could drive the company’s sales upward. These include an anticipated improvement in housing trends, which typically correlate with appliance sales, and a pending electronics replacement cycle that occurs every four to seven years.
Moreover, the firm expects product innovation, particularly involving artificial intelligence, to boost sales by an average of approximately 200 basis points.
Furthermore, UBS highlighted Best Buy’s expansion into new product categories, such as e-bikes and furniture, as a potential growth avenue. The firm predicts that these elements combined could lead to a robust recovery in Best Buy’s sales in the latter half of 2024 and into 2025.
Alcoa (AA)
Alcoa (NYSE:AA) is a major producer of aluminum, known for its mining, refining and smelting operations. Its position in the industrial metals sector and focus on sustainability make it an appealing investment for those interested in materials and infrastructure growth.
Morgan Stanley (NYSE:MS) revisited its recommendations on mining companies, lifting ratings on Alcoa and Freeport-McMoRan (NYSE:FCX). Analysts upgraded Alcoa from “Equal Weight” to “Overweight,” setting a new price target of $50.00, up from the previous $36.50.
The stock upgrades come against the backdrop of disruptions in the global alumina supply, which are expected to keep prices elevated. The broker pointed out that approximately 5.9 million tonnes of alumina capacity disruptions have occurred, accounting for about 10% of the global supply outside of China.
These disruptions, coupled with China’s increased need to import alumina, are anticipated to tighten the global supply and sustain higher alumina prices than historical averages, potentially reaching $500 in the second half of 2024 and $385 in 2025.
The situation is also expected to constrain China’s aluminum production, despite the country’s plans to restart some operations. Morgan Stanley’s projections suggest aluminum prices could be supported at $1.22 in the latter half of 2024 and $1.12 in 2025. This outlook appears to be a driving factor behind the positive sentiment on Alcoa’s stock.
Additionally, Freeport-McMoRan received an upgrade from “Equal Weight” to “Overweight,” with the price target being lifted to $62.00 from the former $49.50.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
