ADVERTISEMENT

Company News

Wells Fargo Sees S&P 500 Index Soaring to 7,007 by End of 2025

BNN Bloomberg is Canada’s definitive source for business news dedicated exclusively to helping Canadians invest and build their businesses.

(Bloomberg) -- A favorable macroeconomic backdrop and easing monetary policy will keep US equities soaring next year after banner performances in 2023 and 2024, according to Wells Fargo Securities, LLC.

By the end of next December, the S&P 500 Index will be sitting at 7,007, the firm’s head of equity strategy Christopher Harvey wrote in a Dec. 3 note to clients. That’s a 15% gain from Wednesday’s close of 6,086. The benchmark is up 28% this year and gained 24% in 2023, only the fourth time in the past 100 years that it’s had back-to-back annual returns of more than 20%.

The ultra-specific forecast is for “James Bond aficionados,” Harvey joked, referring to the way it reads similarly to the fictional spy character’s famous “Double O Seven” nickname. However, it’s actually based on forwarding the index’s valuation of roughly 22 times 2025’s projected profits. In 2026, S&P 500 companies are expected to post combined earnings per share of $318.50, and multiplying that by 22 brings you to the strategist’s figure.

Harvey sees deregulation reigniting merger activity, initial public offerings and animal spirits. He also expects tight credit spreads and the Federal Reserve’s planned interest rate cuts to elevate multiples. But things could go the other way if the yield curve inverts on fears of economic dislocation from President-elect Donald Trump’s proposed tariffs and government spending cuts, and if the Fed’s monetary policy easing is curbed by inflation concerns.

This leg of the rally is distinct from what’s come before in that Harvey isn’t suggesting investors pile into the Big Tech stocks that have dominated the market the past two years. Instead, he recommends a roughly 40% allocation to banks, 40% to communications services, and 20% to consumer staples. On an index level, he prefers the equal-weighted version of the S&P 500 over the regular market-capitalization version as breadth widens — plus, it offers more downside protection. And looking at size and style, he likes mid-cap growth shares.

READ: Wells Fargo Is Wall Street’s Biggest Believer in S&P 500 Rally

Although Harvey was correct directionally in his stock market call this year, he underestimated the extent of the gains like the rest of Wall Street, as the S&P has handily eclipsed his 2024 forecast of 5,830. Harvey’s 2025 target is the highest among prognosticators tracked by Bloomberg, with Deutsche Bank AG and Yardeni Research close behind at 7,000. Goldman Sachs Group Inc., Morgan Stanley, and Bank of America Corp. are all clustered near the 6,600 line.

The exuberance comes even with the S&P 500 trading at historically lofty levels. Over the past decade, the index has averaged a multiple of 18 times earnings compared with more than 22 times now. And the economic backdrop may not be as rosy as hoped, with looming risks from higher bond yields as the Trump administration’s proposals threaten to spur inflation.

Still, Harvey sees more gains ahead for the US benchmark, even with equity valuations at bubbly levels, as positive sentiment, tight credit spreads and solid growth keep stocks climbing.

“We expect the Trump Administration to usher in a macro environment that is increasingly favorable for stocks at a time when the Fed will be slowly reducing rates,” Harvey wrote. “In short, a backdrop where equities continue to rally.”

--With assistance from James Berland.

©2024 Bloomberg L.P.