Capex supercycle and governments ‘running it hot' persuade BNP strategists to boost target prices for S&P 500 and Eurostoxx 600

BNP Paribas strategists have upgraded their S&P 500 target to 6,700 and Eurostoxx 600 to 590, driven by expectations of a capex supercycle, expansive government fiscal policies, and anticipated Fed rate cuts. They project robust corporate earnings growth and view tariffs as a transitory inflation factor that companies can pass through to consumers. While a potential bond market 'wobble' and equity correction are expected in Q3 due to high deficits and tariff-induced inflation, BNP forecasts a subsequent reacceleration, favoring US software/AI, European defense, and Chinese tech plays.

Analysis

BNP Paribas strategists have adopted a bullish medium-term stance, raising their price targets for the S&P 500 to 6,700 and the Eurostoxx 600 to 590. This outlook is predicated on a confluence of powerful macroeconomic drivers, including expansive government fiscal policy in the U.S. and Europe, anticipated monetary easing from the Federal Reserve, and a nascent capital expenditure supercycle fueled by U.S. legislation and German rearmament. The firm's S&P 500 target is underpinned by projected EPS growth of 6% in 2025 and 8% in 2026, assuming a constant P/E ratio of 28, with potential upside to 7,100 if monetary easing prompts multiple expansion to 30. BNP downplays the risk from tariffs, viewing them as a 'one-off bump' to inflation that corporates can pass through to consumers. However, strategists anticipate near-term turbulence, forecasting a 'phase of digestion with a few corrections' in Q3, likely in August or September. This potential market 'wobble' is attributed to bond market risk stemming from above-consensus growth, a tariff-induced inflation blip, and high deficits. Following this expected correction, the firm projects a market reacceleration, recommending exposure to U.S. software/AI, European defense, and Chinese technology stocks to capitalize on these secular trends.

Key Decisions for Investors

• Given the bullish medium-term targets, investors may consider maintaining or increasing exposure to U.S. and European equities, while anticipating potential near-term volatility.
• Prepare for a possible market correction in the third quarter, which could present a tactical buying opportunity ahead of a forecasted reacceleration in stocks.
• Consider overweighting portfolios towards specific sectors identified as beneficiaries of key trends, namely U.S. software and AI, European companies exposed to defense spending, and select Chinese tech stocks.
• Investors should closely monitor bond market yields and inflation data, as a 'bond-market wobble' is identified as the primary catalyst for a near-term equity pullback.