Here are the takeaways from today’s Morning Brief, which you can register to receive every morning in your mailbox accompanied by:
The first results are in and Wall Street strategists publishing forecasts for 2025 see the S&P 500 (^GSPC) the rally will continue over the next 12 months.
But one of the most popular themes of the last 18 months in the markets is missing from their benchmark expectations: artificial intelligence.
AI has driven the market up a trademark market calls dating from spring 2023 when the first report on the explosive results of Nvidia’s cycle started A roaring bull market rally.
On Monday, BMO Capital Markets chief investment strategist Brian Belski set a 2025 year-end target of 6,700 for the S&P 500. Meanwhile, Morgan Stanley chief investment officer Mike Wilson set a target of 6,500 over 12 months.
Neither has focused too much on the impact of AI driving stocks higher – perhaps a sign of a maturing bull market – and instead both discussed further expansion of the rally a far cry from the tech-focused stock market of the past two years.
“We expect this broadening of earnings growth to continue as the Fed cuts rates next year and business cycle indicators continue to improve,” Wilson wrote.
Belski’s work shows the market has already expanded, with 276 stocks outperforming the S&P 500 in the second half of 2024, better than the 10-year average of 238 and above the number seen since the start of 2023.
On the surface, this may lead to smaller gains for the index, as smaller gains in smaller companies lead to smaller overall gains. Going back to 1990, Belski found that when the top 100 stocks in the S&P 500 outperform, the index delivers an average annual return of 11.8%, compared to an average return of 8% when those stocks underperform the index.
In other words, the returns aren’t bad; they are simply not as attractive as those investors have enjoyed for two years now.
To be clear, the idea that an AI fever could continue to drive stock prices higher has not been lost on Wall Street strategists. Just two weeks ago, Julian Emanuel of Evercore ISI wrote that he sees the S&P 500 reaching 6,600 by June 2025 as “exuberance awaits” amid a “public re-engaged in speculation.”
Wilson proposed a bullish scenario in which broad adoption of AI expands margins – and pushes the flagship index near 7,400.
For any investor in the S&P 500, this sure seems like an attractive scenario. But perhaps even more interesting is that strategists no longer need to rely on AI to explain why the market will continue to rise. Even if AI doesn’t show up to the party, Wall Street is expecting a good time.