Investment banks raise forecasts: The S&P 500 could make history

After volatile months, in which concerns surrounding the pricing of technology stocks and the scale of investments in artificial intelligence weighed on the markets, the tone on Wall Street is beginning to change. The S&P 500 closed July unchanged after a 1% decline in June, but in August so far, there has been an increase of over 3%, and a total of about 13% since the beginning of the year.

It was the second-quarter earnings season that forged a more optimistic consensus toward the end of the year, particularly among the major investment houses. Most of them point to signs that the massive investments in AI are beginning to generate demand, revenue, and profits.

An unusual earnings surprise: the turnaround in reports

According to FactSet, in the current earnings season, the companies included in the S&P 500 index showed an increase of about 50% in profits compared to the corresponding quarter — the fastest pace since the second quarter of 2021. About 86% of the companies that have already published reports beat earnings forecasts, compared to an average of about 78% over the last five years. In total, companies beat earnings forecasts by about 29% on average — an especially unusual earnings surprise. The technology sector is expected to show profit growth of about 70%, but eight out of the 11 sectors in the index are also expected to record double-digit profit growth.

The prominent sign of a change in tone comes from JPMorgan, which raised its year-end target for the S&P 500 for the second time in two months, this time to 8,000 points, about 3.5% above the current index level. The bank says that the second-quarter results provide evidence that the massive capital expenditures of the technology giants are beginning to pay off. The growth in the cloud and the increase in the backlog of orders at Amazon, Alphabet, and Microsoft strengthen the assumption that the demand for AI infrastructure will continue to grow. "As the high backlog of orders turns into revenue, cloud growth is expected to remain well-supported, thereby ratifying the increase in capital expenditures on AI," they wrote. The bank predicts that investments in AI will continue to rise, with technology expected to account for more than half of total capital expenditures this year, estimated at about 1.5 trillion dollars.

And JPMorgan is not alone. Morgan Stanley also raised its forecast, and it now expects the S&P 500 to reach 8,000 points at the end of the year, compared to a previous target of 7,800, and 8,300 points within 12 months. Strategist Mike Wilson notes that the fact that profits continue to surprise to the upside even against the backdrop of geopolitical tensions strengthens the argument that the rally in American stocks is receiving increasing support from the economy and business results.

Deutsche Bank also raised its profit forecasts for the index, and it now expects earnings per share of 358 dollars in 2026 and 420 dollars in 2027. The bank emphasizes that the improvement in profitability is not coming only from the technology giants. All 11 sectors in the index are expected to show positive profit growth, and eight of them are expected to record double-digit growth. According to the bank, the contribution of mega-cap companies to the index's profit growth has fallen from 90% a year ago to 57% today, meaning the growth engine of Wall Street is becoming broader.

Prediction markets join the optimism

Kalshi, the world's largest prediction market platform, shows a probability of about 67% that the S&P 500 index will cross the 8,000-point threshold during 2026. At the same time, traders give a probability of about 33% that the index will also cross the 8,200-point threshold this year.

The big question: is the market cheap or expensive

But above the wave of optimism, the question of price hovers as usual. The Shiller price-to-earnings ratio is at a peak not seen since the dot-com bubble. The current price-to-earnings ratio is also at high levels (30). However, the forward price-to-earnings ratio, which refers to profit forecasts, stands at 20, levels close to the long-term average of the S&P 500.

If the Wall Street bulls are right, and the S&P 500 index continues to rise until the end of the year and closes 2026 with a double-digit return, this will be the fourth consecutive year that it does so. In fact, since World War II, there has been only one other time that we have seen such a four-year streak — during the dot-com period of the late 90s.