U.S. stocks are off to a rocky start in 2024, and across Wall Street, analysts have been grumbling about the high bar that America’s largest companies will need to surmount when they start reporting their final batch of earnings for calendar year 2023 in January.
But as sentiment turns increasingly bearish in early 2024, one chief investment officer of a firm with $2 billion in assets believes that the bull run in U.S. stocks is only just getting started.
As a boom powered by the spread of artificial-intelligence technology heats up, major U.S. equity indexes could see their value double or triple over the coming decade.
James Demmert, chief investment officer at Main Street Research, said he believes the S&P 500 could trade at 15,000 or higher within seven to 10 years, while the Dow could rise to 100,000, and the tech-heavy Nasdaq Composite could reach 50,000.
Achieving these targets would necessitate an advance of about 215% for the S&P 500, 170% for the Dow and 235% for the Nasdaq, all without dividends reinvested.
To try to help put this into context, the S&P 500 rose about 160% between January 2014 and January 2024, according to FactSet data.
If Demmert is proven correct, this would mark the best decade of performance for U.S. stocks since the 1990s, when the dot-com boom provoked a Wall Street trading and investing frenzy.
Of course, that episode ultimately ended in disaster when the S&P 500 fell for three consecutive years in 2000, 2001 and 2002. Still, the S&P 500 gained 315% between Jan. 1, 1990 and Jan. 1, 2000, FactSet data show.
Unlike during the dot-com boom, where the bubblelike trading activity was most intense in the “dot-com” stocks, Demmert expects the artificial-intelligence boom will have a different kind of impact. Instead of only conferring gains on major AI winners like Nvidia Corp., Demmert expects stocks across all 11 S&P 500 sectors will eventually find ways to boost productivity and profits using AI.
“Similar to the 1990s, we are experiencing a transformational change in technology that is going to have far-reaching impact,” Demmert told MarketWatch.
Many companies have already started exploring how they can apply the technology, Demmert pointed out, something that is evidenced by commentary in earnings calls, where AI was one of the most frequently discussed topics in 2023.
“We can see it branching out to healthcare and industrial companies,” he said.
Demmert pointed to Adobe Inc.
ADBE,
as an example of how AI could hugely benefit companies’ productivity. Executives at the software company have said they expect AI will help the firm meaningfully increase its revenues without needing to do much hiring.
As for the boost to productivity, there have been some green shoots recently, but economists say it is too soon for AI to be having much, if any, impact.
After years of lackluster productivity growth, economists found cause for excitement back in November, when data from the Labor Department showed the productivity of U.S. workers rising at the fastest pace in three years. Although most economists at the time said it was too soon for AI to be driving this.
Whatever happens, Demmert acknowledged that there is always a risk of stock valuations veering into unsustainable or unrealistic territory.
“You have to be careful what kind of companies you own and what the valuations are,” he said.
But outside of the Magnificent Seven stocks — notably Apple Inc.,
AAPL,
Microsoft Corp.
MSFT,
and Nvidia Corp.
NVDA,
— he said he sees valuations across U.S. stocks as relatively cheap right now.
Looking to the more immediate future, Demmert believes the rest of the market will stage a catch-up rally in 2024 so long as corporate earnings hold. But rather than having topped out, Demmert sees plenty of room for AI darlings like Nvidia to keep on rising should they continue to grow their earnings.
Most of the largest U.S. companies will start reporting earnings later this month. Wall Street analysts have pretty high expectations for 2023, with the FactSet bottom-up consensus estimate calling for S&P 500 firms to grow their earnings by more than 11% during the calendar year 2024.
Demmert’s prediction is reminiscent of comments made by Berkshire Hathaway chief Warren Buffett, who said back in 2017 that the Dow could surpass 1 million in 100 years. Of course, as Buffett joked at the time, he almost certainly won’t be around to take a victory lap if that call pans out.
