US Stocks Surge, But Strategists Warn "Crack on the Ice" In the Tech Sector

Goldman Sachs lifted its 2024 year-end target for the S&P 500 Index to 5,600 from 5,200, while Evercore ISI raised its forecast for the benchmark index to 6,000 from 4,750. Both brokerages cited technology strength and enthusiasm for AI as reasons for their upgrades.

Previously, UBS Group AG’s Jonathan Golub and BMO Capital Markets’ Brian Belski have also set a year-end target level of 5600 points for the S&P 500.

However, amid the bullish sentiment on Wall Street, Sam Stovall, chief investment strategist of CFRA Research, warned that the stock market is in for a correction, as a trio of unfavorable factors will weigh on equity prices.

● Inflation is declining but is still above the Federal Reserve's 2% target, leading central bankers to project just one rate cut by the end of the year.

Source: CME FedWatch

● Higher rates have triggered the longest-ever inversion of the 2-10 Treasury yield curve, the bond market's famous gauge of a coming recession. The indicator, which flashes when the 2-year yield surpasses the 10-year yield, has been a reliable recession signal throughout history, and economists have said that this time likely won't be different.

Source: FRED

● Stock valuations are also high by historical standards, which hints at future downside. The S&P 500 is priced at a 32% premium compared to its average price-to-earnings ratio over the last 20 years, Stovall noted. Tech stocks, which have dominated the market in recent years, are trading at a 68% premium.

"I think we're really stretched and we got to see some upward revisions to earnings estimates, I think, in order to justify that," Stovall said.

Stocks could see their first "crack in the ice" in the tech sector, he added, pointing to lofty valuations among mega-cap tech stocks.

"It's only been tech that's been outperforming the market. I sort of feel this is a jumbo jet that's flying on one engine, and you wonder how long it will stay aloft," he warned.

Source: Yahoo Finance, Business Insider, Reuters