Goldman Slashes S&P 500 Target Citing Path to Higher Fed Rates

Goldman Slashes S&P 500 Target Citing Path to Higher Fed Rates

(Bloomberg) — Goldman Sachs Group Inc. cut his year-end target for the S&P 500 Index to 3,600 from 4,300, arguing that a significant change in the outlook for interest rates moving higher will push valuations for US equities.

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The higher interest rate scenario in Goldman’s valuation model supports a price-earnings multiple of 15 times, compared with 18 times previously, strategists including David J. Kostin wrote in a note Thursday. “Our economists now forecast that the FOMC will raise the policy rate by 75 bp in November, 50 bp in December, and 25 bp in February for a peak funds rate of 4.5%-4.75%. “

Goldman said the risks associated with the latest forecast remain skewed to the downside because of the increased odds of a recession – a scenario that would reduce corporate earnings, widen the yield gap and push the US equity benchmark to a trough. of 3,150. Federal Reserve Chairman Jerome Powell has indicated that he would risk a recession to fight inflation, fueling fears that central banks could overturn global growth.

Equity valuations and real yields have moved into the green phase in recent years but that relationship has faded recently, putting equities at risk, the US investment bank said. It previously assumed that 2022 real rates would end at around 0.5%, compared to a 1.5% assumption now.

Most equity investors have accepted the view that a hard landing scenario is inevitable and focus on the timing, size and duration of a potential downturn, Kostin and his colleagues wrote. Under such a framework, the 3-, 6-, and 12-month S&P 500 targets work out to 3,400, 3,150, and 3,750 respectively, they said.

To be sure, the S&P 500 has not beaten the Stoxx Europe 600 Index since September 12, when Kostin and his team said they saw the United States as a safer bet than Europe. They also say that a year-end rally in US equities measuring 4,300 is possible if inflation shows clear signs of easing.

Goldman’s new base-case target implies a 4.2% drop in the US equity benchmark from Thursday’s close. He forecasts 6-month and 12-month targets for the gauge at 3,600 and 4,000, respectively.

The US bank like many of its peers advises that heightened uncertainty demands a defensive position from investors and that they should own stocks with quality characteristics such as strong balance sheets, high returns on capital, and stable sales growth.

(Additional commentary is added beginning in the fifth paragraph.)

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