Evercore ISI upgrades its S&P 500 outlook to the highest on Wall Street as it says the AI revolution is just getting started

• Evercore ISI expects a 10% surge in the stock market by year-end, driven by AI growth.
• The firm raised its year-end S&P 500 target to 6,000 and said the index could hit 7,000 by 2025. 
• "High multiples are supported by companies' proven record of managing costs and maintaining/growing margins," Evercore ISI said.

The stock market is poised surge another 10% by the end of the year, according to a new forecast from Evercore ISI.

Evercore strategist and managing director Julian Emanuel increased his year-end S&P 500 price target to a new high on Wall Street at 6,000 in a note on Sunday.

Emanuel had previously had a year-end price target of 4,750.

According to the note, the "AI revolution is in the early innings" and that should lead to continued strength in earnings growth. Emanuel forecasts S&P 500 EPS growth of 8% and 5% in 2024 and 2025, respectively.

"The pandemic changed everything. Record stimulus, elevated household cash balances and low leverage support the consumer. Then came AI. Today, Gen AI's productivity potential in every job and sector is inflecting. The backdrop of slowing inflation, a Fed intent on cutting rates and steady growth have supported Goldilocks," Emanuel said.

The S&P 500 trading at 6,000 would imply a 25x trailing 12-month price-to-earnings multiple based on Emanuel's EPS estimate of $238 per share.

While that valuation multiple is extended on a historical basis, it's still well below the dot-com bubble peak of 28x earnings.

"High multiples are supported by companies' proven record of managing costs and maintaining/growing margins," Emanuel explained.

If the high valuation multiples persist, the S&P 500 could rise 31% to 7,000 by the end of 2025.

"A simply time/price extrapolation of prior periods when valuations were as high as they are today could point to S&P 500 at 7,000 by 4Q25/1Q26," Emanuel said.

Along with the S&P 500 price target boost, Evercore ISI upgraded the technology sector to "Outperform" from "In Line" based on aging demographics and the growing adoption of AI technologies.

"The sector is highly exposed to enabling and adopting Generative AI's productivity potential. It also stands to benefit from structural demographic trends as corporates invest in productivity as societies age and labor markets tighten over the long run," Emanuel explained.

That thinking echoes sentiments from Fundstrat's Tom Lee, who expects a massive 10-year bull market driven by the adoption of AI technologies to address a lingering labor shortage.

Finally, Emanuel said that in his bull case scenario, in which investors revisit dot-com bubble-levels of exuberance, the S&P 500 could soar to 6,500 by the end of 2024.

"Stocks are a long way from 'Bubble territory' but rapid gains, and abundant liquidity while earnings rise could 'inflate' — to 6,500," Emanuel said.