Wall Street is growing increasingly optimistic about stocks.

 The major market indices are essentially at record highs with five months remaining in 2024.

The outlooks for earnings and economic growth have been rising all year, so Wall Street does not believe that this surge is finished either.

Three stock analysts that Yahoo Finance tracks have raised their year-end expectations for the S&P 500 during the last two weeks. As of December 30, the benchmark index's Wall Street median objective was 4,850; according to Bloomberg statistics, that number has since increased to 5,250. From 5,200 at the beginning of the year, the Street-high target was raised to 5,600.

Bank of America US and Canada equities strategist Ohsung Kwon told Yahoo Finance, "The present situation is basically what the bulls were looking for, and they are getting it." "It lands softly, basically."

Even while inflation statistics came in higher than anticipated at the beginning of the year, Kwon clarified, it has not shown that price hikes are reaccelerating. Other data, however, has shown a robust but slowing economy, allaying concerns that rapid expansion might cause inflation to soar once more. Kwon says that this has essentially reinforced the narrative of a soft landing that Wall Street bulls had envisioned for going into the year.

With the arrival of this data, markets have undergone a significant change, according to chief investment strategist Brian Belski of BMO Capital Markets. According to Bloomberg data, markets are currently pricing in roughly two rate cuts this year, compared to a peak of almost seven at the beginning of the year. This is consistent with the Fed's latest forecasts, according to which officials preferred two or three rate reductions this year.

"We now realize that we were underestimating the strength of the market momentum, especially in light of the fact that investor expectations and Fed policy guidance have essentially aligned, as opposed to the notable disconnect that was present at the start of the year," Belski stated in a research note dated May 15.

Belski raised his year-end goal from 5,100 to 5,600, setting a new Wall Street high, in that note. He pointed out that given the strength of the stock market at the beginning of the year, more gains are probably in store. According to Belski's examination of historical data, the index rises more than 7% to end the year 70% of the time in years where the S&P 500 rallies more than 8% in the first five months of the year, as it did recently.

However, Belski and other strategists who raised their market forecasts for this year cautioned that further pullbacks are probably in store before stocks continue their upward trend. Belski pointed out that the 5% down in April was insignificant compared to the typical more than 9% decline observed in the second year of bull markets.

However, Belski said that "should a more severe downturn materialize, it will likely occur at higher index levels than we originally predicted," considering the stock market's early-year rise. This would provide the S&P 500 with a higher landing place in the event of a rebound.

"Expressing optimism"

Bullish Wall Street strategists were sure at the beginning of the year that a sustained increase in corporate earnings would be crucial to this year's market advance. And that is how everything has worked out so far. The first quarter of 2024 saw earnings climb by 6%, the greatest rate of growth in almost two years.

What drives earnings has not altered all that much thus far. The majority of the S&P 500's earnings increase is being driven by tech companies, such as Nvidia, which had an outstanding quarter last Wednesday. However, analysts believe that by the end of 2024, the groundwork for a broadening still exists.

According to Kwon, the first stage of the AI cycle has already begun, as seen by rising earnings at firms like Nvidia (NVDA) and investments in the rapidly advancing technology by tech behemoths like Alphabet (GOOG, GOOGL), Amazon (AMZN), and Microsoft (MSFT). However, with recent rises in sectors like energy and utilities, the rewards are beginning to grow.

Kwon stated, "We do not think it is all about Nvidia anymore." "Things are becoming more diverse. power, goods, services, and similar items."

In a recent research note, Kwon pointed out that 37% of the S&P 500's earnings growth during the previous month was driven by Nvidia. In the upcoming year, that is anticipated to amount to a mere 9%.

Binky Chadha, chief equities strategist at Deutsche Bank, also thinks that strong profit growth will continue through the year in other S&P 500 sectors. He raised his target price for the S&P 500 from 5,100 to 5,500 recently, although he acknowledged to Yahoo Finance that there are obvious "risks to the upside" with that estimate.

Firstly, Chadha points out that even if people are "talking positive," there has not been much of a shift in market stance over the last three months. Investors are "overweight" in stocks, according to Deutsche Bank's positioning metric, but not to the "extreme" levels observed in 2021 and 2018.

Chadha believes this indicates that stocks may still have opportunity to rise, especially as he believes the mainstream is not currently pricing in an outperformance of the US economy.

Chadha emphasizes that the fundamental shift in expectations for the US economy has been from an impending recession to growth that is at or below average trend growth. It is not difficult to picture the S&P 500 reaching 6,000 if that consensus keeps moving higher and the US economy expands more than anticipated this year amid what some speculate may be a productivity boom for the US labor force, according to Chadha.