Provided there are no more economic surprises, stocks are unlikely to face a near-term meltdown and the S&P 500 could pull back to 4,000.
That’s according to a team of Goldman Sachs strategists led by David Kostin. The team raised its three-month target on the index
SPX
,
which has climbed more than 7% so far this year from 3,600 to 4,000. But Goldman left its year-end forecast at 4,000, around the middle of a target range of forecasts. of Wall Street from 3,400 to 4,500.
Explaining the short-term optimism in a note to clients on Friday evening, Kostin, chief US equity strategist at Goldman Sachs
GS
,
said resilient U.S. macroeconomic data prevailed over a so far “unspectacular” fourth-quarter reporting season. Some might say the US data is a little too resilient after Friday’s jobs report showed huge job growth of over half a million, much stronger than expected, which again weighed on U.S. stocks on Monday, with the S&P 500 hovering at 4,101.
Adding to this positive U.S. economic picture is China’s earlier-than-expected reopening and reduced recession risks in Europe, the team said, noting that still-light institutional positioning means the market could temporarily overshoot l their bank’s goal of 4,000.
But strategists shrugged off that mirth, noting that because an economic soft landing is already priced into US equities, their year-end target remains where it was for now. They noted that an outperformance of cyclical stocks relative to defensive stocks implies real US economic growth of 2% relative to Goldman’s own forecast below 1% gross domestic product trend in 2023, and a ISM manufacturing index of around 55 compared to a recent reading of 47.
Read: The next few days could reveal if investors have participated in a big sucker rally, says this strategist.
The bank has a baseline earnings-per-share forecast of 0% for 2023 and 5% for 2024, versus consensus numbers of 1% and 12%, respectively. Strategists said analyst expectations, down 10% since the end of June 2023, represent double the historic rate of negative revisions.
Valuations are also already stretched and will be limited by a possible rise in interest rates, Kostin and the team said. “The S&P 500 is trading at 18.4 [times] forward earnings, and an even higher ‘effective’ multiple when you take into account that most investors appear to be expecting earnings well below analysts’ estimate,” they said. .
Kostin and the team said equities can digest rising rates if that change is driven by improving growth expectations. But they don’t see much more expansion in value as Treasury yields continue to rise – they see nominal 10-year yields
TMUBMUSD10Y
gradually dropping to 4.2%.
Read also : How the US dollar could put this stock market rally to the test
Given that their own base case for the S&P 500 already has limited upside potential, a recession could trigger a “substantial decline” for stocks, they warned. They say the index could fall 25% from current levels, landing at around 3,150 in such a scenario, due to lower earnings estimates and a price-earnings multiple falling to 14 times from 18. Currently.
Another risk is that inflation continues to slow but does not approach the Fed’s target, which could trigger tighter monetary policy and higher interest rates. Finally, they remind investors that wrangling over the US debt ceiling, which could erupt later this year, has the potential to hurt stocks as it did in 2011, when the market fell 17%.
State of the Union: 5 key challenges for Biden as he delivers his speech
