The S&P 500 can hit 6,500 next year if these two factors work together, says this economist

By Jamie Chisholm

Critical information for the U.S. trading day.

The new month of equity trading is starting on a positive note, led by gains for Nvidia shares (NVDA) after the AI chipmaker revealed over the weekend that its next-generation Rubin platform is coming in 2026.

However, benchmark Treasury yields BX:TMUBMUSD10Y sit less than 20 basis points shy of their highest levels since early November as concerns about sticky inflation and thus high for longer Fed funds rates constrain the stock market's bullishness somewhat.

James Reilly, market economist at Capital Economics, says that U.S. stocks have been facing these alternating headwinds and tailwinds for a while.

He gives the example of last week, when Treasury yields fell as PCE inflation data held no bad surprises. That helped 9 of the 11 main S&P 500 sectors gain ground Thursday. But with the information technology sector struggling following Salesforce (CRM) and Dell's (DELL) poorly-received earnings reports, the S&P 500 struggled to make headway.

Still, what Reilly terms "AI hype" has ultimately managed to dominate and push the S&P 500 to record highs of late.

"[W]hat matters for IT matters for the market. And over the past year or so, that hasn't been bond yields," says Reilly. "Instead, since late 2022 when ChatGPT was launched, the waxing and waning of AI enthusiasm has seemed the key driver."

AI will continue to support the stock market, because narrow equity bull runs - like the current focus on Nvidia - can go on for years, he reckons. Besides, Reilly believes the rally will broaden.

The dot-com bubble highlighted how hard it is to identify the beneficiaries of a new technology as it is developing. Investors have already identified chip makers and other big tech firms, such as Microsoft, as likely winners but "we remain at the early stages of the AI revolution and, in our view, of the bubble," says Reilly.

"[T]here is plenty of scope for the gains to broaden as the end-uses of AI, and the dominant providers of these uses, becomes clearer," he adds.

But, crucially for stock market bulls, Reilly sees Treasurys also providing a longer term tailwind.

Signs of softening economic data in recent weeks has led Capital Economics to revise down its second quarter U.S GDP growth forecast from an annualized 2.7% only a couple of weeks ago to just 1.2% now.

"We forecast the 10-year Treasury yield to fall from around 4.5% now to 4.0% by end-2024, because we think investors are underestimating how far the Fed will cut interest rates," says Reilly.

"This expectation that AI hype will increase and that Treasury yields will fall underpins our...forecast for the S&P 500 to hit 6,500 by end-2025," Reilly concludes.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are mostly firmer, led by tech, as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is up, while oil prices (CL.1) slipped and gold (GC00) is trading around $2,333 an ounce.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5277.51    -0.51%  2.92%   10.64%  23.24% 
   Nasdaq Composite                                                     16,735.02  -1.10%  3.58%   11.48%  26.39% 
   10-year Treasury                                                     4.484      1.40    -0.60   60.31   79.61 
   Gold                                                                 2345.3     0.43%   0.53%   13.20%  18.57% 
   Oil                                                                  77.16      -0.82%  -1.93%  8.17%   7.30% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. economic data due on Monday includes the S&P flash U.S. manufacturing PMI for May at 9:45 a.m. Eastern, and construction spending for April alongside ISM manufacturing for May at 10 a.m.

GameStop stock (GME) is surging 72% in premarket action after influential trader Keith Gill, under a nom de plume, appeared to show in a post that he had built a large stake in the company.

Paramount Global stock (PARA) is up 5.5% after reports that Skydance Media is offering nonvoting shareholders an option to cash out at a around $15.

Shares of drugs giant GSK (UK:GSK) (GSK) are plunging 8.4% after a ruling by the Delaware State Court that will allow jury trials in cases brought by cancer sufferers who say the heartburn drug Zantac caused their condition.

The Federal Reserve is in purdah until after the next FOMC meeting concludes on June 12th, so there's no Fedspeak for traders to worry about for nearly the next two weeks.

GitLab (GTLB) and HealthEquity (HQY) will reveal earnings after the closing bell.

India stocks IN:NIFTY50 hit a record high after exit polls forecast a landslide election win for Prime Minister Narendra Modi.

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The chart

Here's another illustration, courtesy of Jonathan Krinsky, technical strategist at BTIG, of how little breadth there has been during the market's bull run.

"The last time the percentage of R3K stocks above their 200-day moving average exceeded 75% was July '21, or 716 days," says Krinsky, referring to the Russell 3000 stock index RUA. "That is the second longest streak since '95, and is unprecedented for a market that has made new all-time highs."

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   GME     GameStop 
   AMC     AMC Entertainment 
   NVDA    Nvidia 
   TSLA    Tesla 
   FFIE    Faraday Future Intelligent Electric 
   NIO     Nio 
   HOLO    MicroCloud Hologram 
   AMD     Advanced Micro Devices 
   AAPL    Apple 
   SMCI    Super Micro Computer 

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-Jamie Chisholm

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06-03-24 0855ET

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