Barclays U.S. strategists have raised their 2024 price target for the S&P 500 to 5600 from the previous 5300, citing a slight premium to the current fair value of the index without the technology sector (SPX ex-Tech), and a 34x multiple for Big Tech.
The strategists believe that inflation will continue to normalize while the economy remains resilient, and that Big Tech will sustain its leadership in next twelve months (NTM) earnings growth. This results in a 23x multiple of their base case FY24 S&P 500 earnings per share (EPS) estimate of $241.
"34x is a reasonable base case valuation for Big Tech, as the group has consistently earned into its multiples over the last several quarters,” strategists said in a Tuesday note.
“Despite Big Tech's 35% price return year-to-date, P/E remains well off post-COVID peak levels of 37x because of its strong EPS results and upward revisions to forward estimates."
Furthermore, Big Tech's growth-adjusted multiples are not seen as overly stretched, Barclays noted. The group's 2-year price/earnings-to-growth (PEG) ratio is not significantly higher than that of the S&P 500, and Big Tech's PEG has been declining year-to-date as the group continues to benefit from several growth vectors, including the second wave of the AI ecosystem.
Meanwhile, Barclays' fair value price-to-earnings (P/E) estimate for the remainder of the S&P 500 has increased recently.
“SPX ex-Tech is currently trading quite close to our fair value estimate, after trading at a large premium throughout most of 2023,” strategists pointed out.
Their fundamental valuation framework indicates that the fair value P/E for the S&P 500 ex-Tech is benefiting from cooler inflation and improved manufacturing PMI over the past year, though higher interest rates remain a headwind.
As for its bull and bear case scenarios, Barclays said these revolve around the multiples assigned to Big Tech, reflecting the group's significant influence on the US equity market.
If Big Tech companies continue their beat-and-raise streak and secure an even higher forward valuation, the S&P 500 could reach 6100 by year-end. In contrast, a drop below already high expectations could push the benchmark index as low as 4950.
Strategists also set a 2025 price target for the S&P 500 at 6500, based on 24x their base case 2025 earnings estimate of $268.
“While substantial uncertainty surrounds FY25 estimates at this stage, we expect most of the macro inputs to our EPS framework to be smaller (but still negative) headwinds for earnings growth next year, with the exception of weak EM growth,” they said.
The bank’s team believes that the current Street consensus for FY25, which stands at $280, appears overly optimistic.