The potential upside for the S&P 500 is expected to widen in the second half of 2024 after gains were supported by a handful of AI-related companies in the first six months of the year, according to analysts at Wells Fargo.
The company’s profits rose 14.5% year-to-date in the first half of the year, the third-best performance over a six-month period in the past 25 years.
But only a handful of names accounted for the rally, with a subsector of four of the so-called “Magnificent Seven” companies — Apple (NASDAQ: ), Amazon (NASDAQ: ), Microsoft (NASDAQ: ), Nvidia (NASDAQ: ), Tesla (NASDAQ: ), Alphabet (NASDAQ: ), and Meta Platforms (NASDAQ: ) — accounting for just over 52% of S&P 500 returns, according to FactSet data cited by Wells Fargo. Meanwhile, the remaining 490 companies in the 503-company index accounted for less than 48% of the gains.
In a note to clients, Wells Fargo analysts said consensus earnings estimates show growth will become “significantly” more widespread starting in the fourth quarter of this year and “gain traction” by the middle of next year.
“This increased earnings growth is consistent with our expectations and should support a growing number of shares over the next 18 months,” Wells Fargo analysts said. “We believe SPX’s overall earnings growth is likely to remain relatively strong in the coming quarters, and we see the U.S. and global economies recovering and performing better in the second half of 2025.”
However, they warned that stocks face a “rough road” in the near term due to a slowing economy and rising interest rates that continue to “impose a heavy toll.”
“For now, we suggest paring gains in sectors that have performed better and looking for opportunities in energy, industrials, materials and healthcare,” the analysts said.