Industrial and Commercial Bank of China raises year-end target for S&P 500 index to 7950 points, bullish on AI sector and cyclical stocks for further upside.

With the easing of the situation in the Middle East, improvement in market sentiment, and investors gradually digesting the potential rate hikes by the Federal Reserve, Fuguo Bank Securities believes that there is still further room for the US stock market to rise, and has raised the year-end target for the S&P 500 index. Fuguo Bank has increased its year-end target for the S&P 500 index from 7300 points to 7950 points by the end of 2026, still representing an approximately 5% increase from Monday's closing level. This adjustment comes as the United States and Iran plan to formally sign a temporary peace agreement in Switzerland this Friday. It is widely believed that this agreement could bring an end to months-long conflicts and help to restore normal navigation in the Strait of Hormuz, thereby alleviating global energy supply pressures. Ohsung Kwon, stock strategist at Fuguo Bank, stated that the easing of relations between Washington and Tehran is reducing market concerns about the macroeconomy. He pointed out that the inflation pressures brought on by the rise in oil prices are expected to gradually ease, and market sentiment has cooled from previous excessive optimism to a relatively neutral level, providing new upward momentum for the artificial intelligence (AI) sector. In his latest report, Kwon wrote, "Market sentiment has been reset, creating conditions for the resurgence of AI trading." Based on this assessment, Fuguo Bank recommends investors to continue to allocate resources to the semiconductor sector and increase holdings of cyclical stocks. The institution believes that as conflicts in the Middle East gradually subside, economically sensitive industries are expected to see a rebound, while defensive sectors that were previously favored by funds may lag behind relatively. Although market attention is shifting from geopolitical risks to the first policy meeting chaired by the new Federal Reserve Chairman Jerome Powell this week, Fuguo Bank believes that the market's expectations for the "Powell era" are relatively moderate at present. Kwon stated that inflation remains the biggest risk factor for the current US stock market, but this is contingent upon whether the Federal Reserve chooses to address inflation through further rate hikes. He noted that if in the future the Federal Reserve allows the economy and inflation to maintain relatively high levels to some extent, rather than adopting aggressive tightening policies, then stocks will remain one of the most effective assets against inflation. "If policy choices allow the economy to moderately overheat and gradually digest debt pressures through inflation, then this environment will actually be favorable for the stock market." Fuguo Bank believes that although the market has begun to discuss overvaluation issues in the AI industry, artificial intelligence will still be an important driver of the US stock market's rise. The institution points out that after experiencing previous adjustments, sentiment indicators related to the Nasdaq 100 index have returned to neutral, indicating that funding is likely to flow back into the AI industry chain. In particular, in the semiconductor sector, as global data center construction, AI infrastructure investments, and corporate digital transformation continue to progress, the industry fundamentals remain robust. However, Fuguo Bank also warns investors that there are risks in the future of the US stock market. Firstly, the approaching midterm elections in the United States may bring market volatility. Kwon pointed out that historical data shows that in midterm election years, there is a 71% probability of the S&P 500 index experiencing a decline of over 10% in the second half of the year, so political uncertainty may impact market sentiment. Secondly, the AI industry may face stricter policy regulation in the future. Kwon mentioned that currently, some voters are not entirely positive about the development of AI technology, and once the US political scene begins to push for policies that restrict AI development, it could impact a significant force that has been driving the rise in the US stock market over the past year. He stated, "Any policy discussions about slowing down the pace of AI development could create pressure on market indices." Fuguo Bank believes that against the backdrop of easing geopolitical risks, improved market sentiment, and a solid rationale for AI investments, the long-term upward trend of the US stock market is not yet over, but investors still need to pay attention to inflation, monetary policy, and potential regulatory changes that may bring periodic volatility.