Capital Economics explains the reasons why the S&P 500 is worth paying attention to.

Investing.com - Capital Economics analysts say that recent strong profit growth in corporate earnings reports could be a positive signal that the benchmark S&P 500 will perform well for the rest of this year.

In a report to clients, strategists including Thomas Mathews believe that the latest quarterly performance of the index’s components “clearly indicates that 2025 will be a good year.”

Considering Nvidia’s better-than-expected performance, which accounts for a significant portion of the U.S. stock market, analysts say that the overall earnings per share (EPS) of the key IT sector in the S&P 500 seemed to have grown by about 25% last year. They add that despite market concerns that profit growth may slow down, this pace is “significantly faster than in 2024.”

Analysts note that earnings reports also show that healthcare, industrial, and financial sectors are “strengthening.” These sectors, combined, form the largest sectors outside of technology, so analysts believe that even if tech sector profits eventually cool off, “the S&P 500 now has more buffer room.”

They point out that although recent market worries about the impact of new AI models on the software industry and doubts about the sustainability of large tech companies’ huge investments in AI infrastructure persist, overall earnings are still expected to grow in double digits this year.

“Tech companies seem to be performing particularly well again,” the analysts wrote.

Meanwhile, the impact of AI turbulence on the broader market “may not necessarily be scary,” indicating that many “lost profits of software companies (if they do indeed lose profits in the end) could shift to other companies, especially those selling access to AI models and those that previously paid for the software.”

Analysts believe that valuations could further expand, noting that the forward P/E ratio of the S&P 500 has not actually increased significantly over the past two years.

“We think it could rise further,” the analysts said, predicting the S&P 500 will reach 8,000 points by the end of the year. On Wednesday, the index closed at 6,946.13 points.

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