Following the most severe sell-off in the semiconductor sector since 2020, major Wall Street institutions have not altered their bullish outlook on the U.S. stock market. On the contrary, several investment banks, including Citigroup, Morgan Stanley, and Goldman Sachs, have recently raised their year-end targets for the S&P 500, betting that AI-driven earnings growth will continue to support the market's push to new highs.
Last Friday saw a sharp downturn for U.S. tech stocks. A sell-off triggered by disappointing guidance from AI chip leader Broadcom and a strong nonfarm payrolls report led the Philadelphia Semiconductor Index to plunge over 10% in a single day, its largest drop since the 2020 pandemic shock. The Nasdaq Composite recorded one of its largest single-day point declines in history, erasing approximately $1.8 trillion in market value.
The fear from the sell-off spilled over into Monday's Asia-Pacific trading session. South Korea's KOSPI index plummeted over 8% at the open, triggering a circuit breaker and halting trading for 20 minutes. Japan's Nikkei 225 index fell more than 3%, with SoftBank Group shares tumbling over 9%.
This global repricing of AI assets is occurring just a week before SpaceX's record-breaking IPO, ten days before new Federal Reserve Chair Kevin Walsh's first policy meeting, and as what some call the "most divisive bull market on Wall Street" takes shape.
Yet, at the epicenter of this storm, two of Wall Street's most influential equity strategists—Morgan Stanley's Mike Wilson and Citigroup's Scott Chronert—have arrived at the same conclusion: the pullback is healthy, and the bull market is far from over.
Morgan Stanley's Wilson: Correction is "Inevitable and Benign," Maintains 8000 Target
At a moment when market confidence is teetering, Mike Wilson's voice stands out. As one of Wall Street's most accurate strategists in recent years, he offered a clear and firm assessment in a Monday research note: last Friday's positioning-driven sell-off was a "healthy adjustment." For the bull market to continue into year-end, he stated, a "pullback is both inevitable and ultimately benign."
Wilson is not blindly optimistic. He precisely dissected the nature of the correction: "This pullback was led by semiconductors and memory chips, stocks that had rallied sharply year-to-date and were held in excessively concentrated positions within hedge funds and leveraged ETFs." In other words, the core driver was not a deterioration in fundamentals but a natural unwinding of previously overcrowded trades.
Data shows hedge funds' net exposure to semiconductors was at the 98th percentile historically as of last week. Such extreme positioning can magnify downward momentum when market sentiment shifts even slightly. The Philadelphia Semiconductor Index fell 12% over Thursday and Friday combined.
Wilson's optimistic view rests on a more fundamental pillar: continued strong corporate earnings and broadening growth. He argues that the AI infrastructure investment wave is spreading downstream. The outperformance of chip stocks will gradually diffuse to software, cybersecurity, data center operations, and even AI applications in traditional industries, creating more diversified earnings support.
Wilson maintains his year-end S&P 500 target of 8000, implying roughly 8% upside from current levels. He also set a preliminary mid-2027 target of 8300. Recalling his stance during the initial market reaction to the Iran conflict—when he remained positive on earnings prospects during a panic sell-off, a view later vindicated by the rebound—Wilson is again taking a contrarian "anti-panic" stance.
Citigroup's Chronert: AI Supercycle Only at "Midpoint," Earnings Are Core Support
If Wilson provided the "bull market can continue" verdict, Citigroup strategist Scott Chronert offered what may be the most detailed earnings data to support it. Over a weekend when Wall Street largely abandoned 2026 rate cut expectations, Citigroup bucked the trend by raising its year-end S&P 500 target from 7700 to 8100, making it one of the most bullish major banks.
Critically, this increase was "not due to multiple expansion, but a robust acceleration in corporate profitability." Chronert significantly raised his 2026 S&P 500 earnings per share (EPS) forecast from a December 2025 estimate of $320 to $350, and introduced a preliminary 2027 forecast of $400.
Citigroup noted in a first-quarter report that actual S&P 500 earnings exceeded consensus estimates by about 13.4%—a magnitude of surprise historically seen only in the early stages of post-recession recoveries, with no recession currently in sight. The bank admitted it "has not witnessed a similar situation in the past four decades."
Citigroup explicitly rejects defining the current environment with "traditional cycles," instead characterizing it as a "one-off capex supercycle" and believes it is currently in a "mid-cycle phase." This implies earnings growth momentum has not yet peaked, but its fastest phase may be over; future index gains will rely increasingly on earnings growth itself, not valuation expansion.
Citigroup's optimism comes with a key caveat. Strategists acknowledge that the investment thesis for AI infrastructure is now widely recognized by the market, which is also the "root cause of asymmetrically expanding downside risks—the more well-known a theme, the faster the market reprices once a deceleration signal appears." Chronert bluntly noted that whether AI-driven growth can persist beyond 2027 remains a key question, warning that "a slowdown (or even decline) in spending growth will ultimately lead to an after-effect in the stock market. But this is not yet visible."
Goldman's Nine Indicators: Market Overheating Not at Extreme Bubble Levels
In its latest research, Goldman Sachs notes that while some signs of overheating are present, several key indicators show the current market remains significantly distant from the extremes seen during historical bubbles. The report states, "Speculative fervor alone is not a precise timing tool, but it is a typical characteristic of the final stages of past high-valuation, highly concentrated bull markets."
Goldman strategist Ben Snider and his team developed a monitoring framework covering four dimensions—price performance, trading activity, investor sentiment, and corporate expectations—comprising nine metrics. The study shows the median ranking of these indicators is currently at the 86th percentile since 1995; by comparison, it reached the 100th percentile during the dot-com bubble and the 95th percentile at the 2021 market peak.
The report specifically notes that market breadth has narrowed significantly, meaning a large portion of gains is driven by a relatively small number of stocks. However, Goldman emphasizes current market concentration remains below levels seen during the late-1990s tech bubble. Unlike past speculative rallies, the recent U.S. stock advance has been primarily driven by improved earnings expectations. Year-to-date, the consensus S&P 500 EPS forecast has risen 16%, outpacing the index's 8% price gain. Goldman expects robust earnings growth to continue, forecasting S&P 500 EPS to reach $340 in 2026, a 24% increase from 2025.
Regarding trading activity, Goldman's speculative trading gauge has risen in recent months but remains below levels seen during the dot-com bubble and the 2021 market surge. This indicator tracks trading in unprofitable companies, low-priced stocks, and stocks with high valuation multiples. Trading activity in high-multiple stocks—those with an enterprise-value-to-sales (EV/Sales) ratio above 10x—is near multi-decade highs, second only to the 2000 dot-com bubble period.
Meanwhile, the median short interest as a percentage of market capitalization for S&P 500 constituents is 3.2%, the highest level since the 2008 financial crisis and well above levels at the 2000 and 2021 market peaks. Goldman believes this indicates investors' actual positioning is more cautious than many sentiment indicators suggest.
Three Upcoming Tests for the Market
Amid this "bull market not over" narrative, the next 30 days present three significant tests.
The first is CPI Data and the Rate Path. The U.S. May CPI data due Wednesday is expected to show a year-over-year increase potentially as high as 4.3%, which would be the highest level since 2023, driven by energy prices amid the Iran conflict. If inflation data comes in hotter than expected, the 10-year Treasury yield could rise further, putting more pressure on growth stock valuations. Goldman has completely abandoned its expectation for rate cuts this year and raised its probability of a rate hike from 10% to 20%; BNP Paribas even predicts the Fed will hike three times starting in December.
The second is Walsh's First FOMC Meeting. On June 17th, new Fed Chair Kevin Walsh will preside over his first interest rate decision meeting. The market has largely priced in no change for June, but the greater suspense lies in the tone Walsh sets—will it be hawkish signals or maintaining the current neutral stance? His preferences, such as favoring "trimmed mean inflation" metrics and a tendency to abolish the dot plot, will be scrutinized by the market in his debut.
The third is SpaceX's Record-Breaking IPO. SpaceX, expected to list around June 12th with a fundraising target between $75 billion and $86.2 billion, is set to become the largest IPO in global history. This unprecedented liquidity "siphon" has already partially affected tech sector fund flows. Some of last Friday's sell-off was attributed to investors pulling funds in advance to subscribe to the SpaceX offering. The pace of liquidity returning post-IPO and the subsequent portfolio rebalancing will continue to influence short-term tech stock performance.
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