Wall Street's most optimistic strategist: US economic growth is strong, and the S&P 500 will hit the 7,000 mark next year

The Zhitong Finance App learned that Deutsche Bank's Bankim Chadha said that the S&P 500 index will reach 7,000 points by the end of next year, making him one of the most optimistic Wall Street strategists predicting a further rise in the US stock market.

Chadha's target is the highest of any strategist tracked by the agency, which means the index will soar 17% from its current level. This forecast far exceeds that of Goldman Sachs and Morgan Stanley's peers, who recently raised their expectations and the benchmark index is expected to reach 6,500 points by the end of 2025.

Since this year, the S&P 500 has surged more than 25%, and is expected to return more than 20% for the second year in a row — this has only happened four times in the past 100 years. Driven by tech giants, a resilient economy, slowing inflation, and expectations of the Federal Reserve's easing of policies pushed the benchmark index to a record high. Chadha has been optimistic about the US stock market throughout the year and has raised the expected target for the index several times.

Chadha and her team wrote in a report on Monday: “We expect the steady strong momentum to continue until 2025, and the earnings per share growth rate will remain low in double digits.”

According to Chadha, earnings per share of S&P 500 companies are expected to grow 11% to $253 in 2024, in line with the typical growth rate outside of a recession. By 2025, this figure could rise to $282. But he added that if global economic growth returns to the upper limit of the historical range, earnings growth could rise 17%, bringing S&P's earnings per share to a maximum of $295.

The US stock market has continued to prosper for two years and has formed a huge valuation gap with the rest of the world. The current expected price-earnings ratio of the S&P 500 index is about 24 times. This is a new high since the outbreak of the epidemic, close to the highest record during the tech bubble. However, Chadha said the overvaluation is reasonable and the range is likely to expand further, citing higher-than-trending earnings growth and payout rates over the past 10 years. Growing buybacks and equity flows have also played a supporting role.

Although Trump may implement policies that have both positive and negative effects on economic growth, the sequencing of policies will be critical. The strategist said this may be similar to Trump's previous term, when tax cuts and deregulation came first, followed by tariffs, and added that economic growth may still be a top priority.

“We think every aspect of the economic cycle is yet to come,” Chadha wrote. The factors he mentioned include a shift from inventory removal to inventory replenishment, a recovery in capital spending outside of the tech sector, and a recovery in manufacturing. It also indicates rising consumer and business confidence, and a rebound in capital markets and M&A activity.