Goldman Sachs boosts S&P 500 forecast as AI drives growth

Goldman Sachs has increased its S&P 500 price target for the year, thanks to the booming artificial intelligence (AI) sector and the broadening of the market rally beyond the biggest tech names.

The bank now expects the S&P 500 to end the year at 4,700, up from its previous forecast of 4,300. That implies a 12% gain from the current level of around 4,200.

The main reason for the bullish outlook is the strong performance of the AI sector, which has been growing rapidly and transforming various industries. According to Goldman Sachs, AI companies have contributed to 40% of the S&P 500 earnings growth in the past year, and are expected to continue to drive innovation and productivity in the future.

"AI is not only a source of growth, but also a source of resilience," said David Kostin, chief U.S. equity strategist at Goldman Sachs. "AI companies have shown greater profitability and stability than the broader market during the pandemic, and have also benefited from the acceleration of digital trends."

Another factor that supports the higher S&P 500 target is the broadening of the market rally beyond the biggest tech names. While the FAAMG stocks (Facebook, Amazon, Apple, Microsoft and Google) have been leading the market for years, Goldman Sachs expects more participation from other sectors, such as financials, industrials and consumer discretionary.

"We expect a rotation toward more cyclical and value-oriented sectors as the economy reopens and inflation rises," Kostin said. "We also see opportunities in some of the smaller and mid-cap stocks that have lagged behind the large-cap leaders."

Of course, there are still some risks that could derail the market rally, such as a resurgence of Covid-19 cases, a policy mistake by the Federal Reserve or a geopolitical conflict. However, Goldman Sachs believes that these risks are manageable and that the overall outlook for the U.S. economy and corporate earnings is positive.

"We remain optimistic about the U.S. recovery and the prospects for corporate profitability," Kostin said. "We think that investors should stay invested in equities and take advantage of the opportunities that AI and other sectors offer."

Additional reading: