Is there much scope for the S&P 500 to build on its gains?

We think there is ample scope for the US stock market to perform strongly in 2024 and 2025. Admittedly, this year’s rally in the S&P 500 hasn’t had much to do with expectations of faster growth in earnings per share (EPS). Instead, it seems mainly to reflect a big drop in the equity risk premium (ERP), which has more than offset a rise in the “risk-free” component of investors’ required real return from equities. Nonetheless, the ERP is not especially low, and we expect the “risk-free” component to drop back. Expected EPS may also hold up better than we had once thought, as a recession now looks more doubtful.