The team at Capital Economics was among the most bullish we found on the outlook for stocks in 2024.
The firm sees the benchmark S&P 500 rising to 5,500 by the end of this year, and adding another 1,000 points — roughly 18% — through the end of 2025, hitting 6,500 in a little under two years.
In a note to clients published Wednesday, the firm’s chief markets economist, John Higgins, walks through the main pillars of this forecast as investors have kicked off the year with some trepidation.
Higgins’s view most simply boils down to an argument that earnings can continue to rise and AI hype will ultimately inflate a stock market bubble.
Comparing the conditions for the market today to those that preceded the tech bubble in the late ’90s, Higgins notes, among other things, that while valuations for the market’s tech leaders are elevated, there is both scope for valuations to rise further both for this basket of stocks and the market overall.
The simplest way to think about valuations rising is that stock prices — or the amount investors pay for each $1 of earnings — rise while actual profits don’t.
“Our current end-2024 and end-2025 forecasts for the S&P 500 are 5,500 and 6,500, respectively,” Higgins wrote. “Punchy as these projections may appear, the valuation of the index would only have to rise to roughly the level it reached before the dot com bubble burst for them to be [realized] — based on what are think are plausible outcomes for EPS.”
“Our analysis leads us to conclude that, provided the economy skirts a recession, there is scope for a bubble to inflate in the S&P 500 this year and next,” Higgins added.
“We envisage the index becoming even more top heavy in the process, but do think that most sectors will fare well even if those that stand to benefit the most from the advent of AI keep leading the charge.”