(Reuters) – With visibility on the U.S. economic outlook greatly reduced by the fog of war and $100-a-barrel oil, it might seem an odd time to be getting more bullish on stocks. But from a valuation, earnings, and growth perspective, there’s a compelling case.
Strategists at Barclays outlined it this week as they raised their S&P 500 price and earnings forecasts, and they’re not the lone bulls. Corporate America won’t entirely escape the economic fallout from the Iran war and energy shock, they argue, but it’s relatively well positioned nonetheless.
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Take tech, the juggernaut that powered Wall Street’s boom in recent years. It has sputtered lately on worries that firms are overspending on artificial intelligence, while concerns about AI disruption have rattled the shares of software companies.
The “Big Tech” selloff has been, well, pretty big. The Roundhill “Magnificent Seven” ETF, for example, is down 10% this year, three times as much as the S&P 500. This means the tech sector is cheaper now than during the depths of the “Liberation Day” turmoil a year ago, as measured by the 12-month-forward price/earnings ratio.
That multiple is hovering around 21, the lowest in three years and down a third from last October. That’s a remarkable re-rating of a pivotal sector in a relatively short space of time.
The valuation premium that tech long enjoyed over the broader stock market has almost evaporated and is now the smallest in seven years. A narrower measure of that premium – the “Mag Six” shares over the S&P 500 – is the smallest since the Global Financial Crisis in 2008-09, according to equity strategists at Jefferies.
THE RE-RATING GAME
One could reasonably argue that such a sweeping reset was long overdue because tech stocks were far too expensive. Current valuations have simply returned to their long-term averages.
But tech is not just cheaper now, it looks outright cheap given these companies’ earnings outlooks.
The latest LSEG consensus estimate for tech earnings growth in calendar year 2026 is 42.5%, well up from 30.8% on January 1 and nearly double what it was six months ago.
“We believe the U.S. continues to offer stronger nominal growth than other major economies and a secular growth engine in technology that shows few signs of stopping,” Barclays strategists wrote this week.
They raised their S&P 500 earnings per share estimate for this year to $321 from $305, and the index price target to 7650 from 7400, implying gains of around 16% from Wednesday’s close.
“We are incrementally bullish on U.S. equities, though the road likely stays bumpy until we turn a corner,” they added.
OVERWEIGHT AND SEE
What’s particularly notable is that consensus U.S. earnings estimates have steadily risen over the last two months as the S&P 500 has steadily fallen. Does that signal an unjustifiably optimistic outlook for U.S. corporates, or an overly gloomy market reaction to the external environment?
For now, it looks like it could be the latter.
Wall Street has outperformed its global peers in the four weeks since war in the Middle East broke out. That’s partly due to the relative strength of U.S. growth, tech, and earnings, and because the U.S. is self-sufficient in energy.
These conditions are unlikely to change dramatically any time soon.
“We remain overweight on U.S. equities due to resilient growth, solid corporate earnings and continued innovation,” HSBC Private Bank analysts wrote in their second quarter outlook.
Even fears of elevated U.S. inflation, which is already nudging 3% and rising, don’t necessarily need to be a stumbling block for America Inc. Higher price rises should inflate nominal earnings, especially in sectors with strong pricing power.
At this juncture, with geopolitical tensions arguably the highest in decades, holding an overweight position in any equity market is fraught with risk, but if you’re going to do it, maybe Wall Street is the “safest” place.
(The opinions expressed here are those of Jamie McGeever, a columnist for Reuters)
By Jamie McGeever; Editing by Marguerita Choy
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