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Investing.com -- Analysts at Capital Economics said in a note to clients this week that they believe, despite years of strong gains and all-time highs in the S&P 500, the index isn’t set to run out of steam, with enthusiasm over artificial intelligence and other factors such as Fed policy and economic growth set to determine how the index performs from here.
“It can be tempting to think the risks will be skewed to the downside,” wrote the firm, noting the recent all-time high. “But 12-month inflation-adjusted returns since 1964have been slightly stronger following new all-time highs compared to the average day.”
While the firm acknowledged that the data is “often sensitive to time horizons,” they “don’t find any compelling evidence that real returns are significantly different to average after hitting all-time highs.”
“The upshot is that while headlines about the level and momentum of the stock market are understandable, we aren’t convinced either has a clear implication for future returns.”
The firm added that performance following these milestones is instead dependent on many of the usual drivers such as Fed rate cuts, GDP growth, valuations, and new technologies.
“On past form, the macro backdrop we envisage over the next year…looks consistent with decent returns,” wrote Capital Economics. “But given starting valuations and the fact 125bps worth of cuts are priced, we think the cyclical backdrop is consistent with the S&P 500 drifting sideways.”
However, like the dotcom bubble, the analysts believe “this relatively neutral cyclical backdrop” will coincide with a secular tailwind: the enthusiasm for AI. “We continue to think that the rally in AI-related stocks has room to run, lifting the S&P 500 both in absolute terms and relative to markets elsewhere,” concluded Capital Economics.
The firm forecasts the S&P 500 to rise to 7,250 by the end of 2026.