Several heavyweights predict a strong finish for the S&P 500 Index (SP: .INX) in the next two years, which could be good news for those seeking exposure to US shares.
As a reminder, the S&P 500 Index is the major index tracking the performance of the US stock market. It represents the top 500 companies by market capitalisation and other factors like earnings growth and trading liquidity.
Goldman Sachs' chief US equity strategist, David Kostin, has raised his target for the S&P 500 after a strong earnings season.
The strategist lifted the target to 6,500 by the end of 2025, signalling a potential 10% gain from current levels.
For reference, it currently sits at 5,916 points. Such growth bodes well for the ETF tracking the index, the SPDR S&P 500 ETF Trust (ASX: SPY).
This optimism is underpinned by expectations of continued US economic expansion, steady earnings growth, and stable bond yields.
Let's take a closer look.
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Why are strategists bullish on the S&P 500 Index?
The S&P 500 Index has delivered a solid performance, up 24% year to date. This has been driven by the artificial intelligence (AI) boom and economic stability of the US.
Big names like Nvidia Corporation (NASDAQ: NVDA) have fuelled much of this rally, with the "Magnificent Seven" tech stocks significantly outperforming the broader index in 2023 and 2024.
However, Goldman predicts a shift in 2025.
The "Mag–7" as they are often dubbed — Apple Inc (NASDAQ: AAPL), Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG), Microsoft Corporation (NASDAQ: MSFT), Amazon.com Inc (NASDAQ: AMZN), Meta Platforms Inc (NASDAQ: META), Tesla Inc (NASDAQ: TSLA), and Nvidia — are expected to narrow their outperformance.
While these stocks will likely continue to grow, Kostin sees gains broadening across the remaining 493 companies in the S&P 500 Index.
In our baseline macro outlook, the economy and earnings continue to grow and bond yields remain around current levels,
The narrowing differential in earnings growth rates should correspond with a narrowing in relative equity returns,
Although the 'micro' earnings growth story supports continued 'Magnificent 7' outperformance, more 'macro' factors such as economic growth and trade policy lean in favor of the S&P 493 [the other constituents of the index].
Will AI remain a growth driver?
This is a question on many investors' minds as we head towards the end of the year. In Goldman's eyes, AI remains central to growth forecasts, but the focus may shift.
The firm expects gains to move from AI infrastructure companies like Nvidia. It manufactures chips. But businesses leveraging AI to drive revenue growth are also set to benefit.
This includes giants such as Meta and Apple, which are rapidly integrating AI into their operations and have huge R&D budgets to do so.
Goldman also highlights macroeconomic factors, such as trade policy and fiscal measures, that could influence the S&P 500 Index's trajectory.
For example, "friendlier" fiscal policies could further lift stocks, while risks like tariffs or rising bond yields could dampen gains.
Safe to say the outlook is fairly balanced when considering all of the risks.
Foolish takeaway
Although the path to 6,500 for the S&P 500 Index isn't guaranteed, Goldman Sachs believes the case for growth is compelling.
A broadening rally, supported by AI-driven innovation and economic resilience, could present opportunities for Australian investors looking to diversify into US equities.
