S&P 500 Forecast
Goldman Sachs (Rank#9), a renowned investment bank, has joined the growing list of market strategists who have increased their year-end target for the S&P 500. The bank’s equity strategy team, led by David Kostin, raised their target to 4,500 from 4,000, citing a new “soft landing” forecast and better-than-expected earnings.
Goldman Sachs acknowledges that the price-to-earnings (P/E) multiple of 19x is higher than anticipated, largely driven by a few mega-cap stocks. However, the bank believes that previous instances of narrowing breadth in the market have been followed by a broader re-rating of valuations. They highlight the potential profit boost from artificial intelligence (AI) as expanding the upside potential for equities, while also cautioning about left tail risks such as recession and hawkish Federal Reserve policies.
The recent entry of the S&P 500 into bull market territory has historically resulted in outsized gains over the following 12 months. This trend has prompted other strategists, including Bank of America, BMO, RBC, and Truist, to raise their expectations for the S&P 500 as well.
Goldman Sachs also emphasizes the role of AI as a significant driver behind the stock market rally. They believe that the potential upside from this disruptive technology is not fully priced into the S&P 500 yet. However, the bank acknowledges that market breadth, or the breadth of the current rally, is at its narrowest levels since the tech bubble in 2000. Similar periods in the past have often been followed by sideways market movement and larger-than-average drawdowns. Nevertheless, Goldman Sachs suggests that a catch-up phase is likely, with S&P 500 valuations and prices increasing alongside a reversal of intra-market momentum.
The positive outlook for the end of 2023 is also supported by stronger-than-expected economic data, leading economists and market strategists to project a more favorable market environment than initially anticipated. Goldman Sachs recently reduced the likelihood of a 2023 recession from 35% to 25%, while Wells Fargo even expects a recession as early as the first quarter of 2024.
Goldman Sachs’ upward revision of its S&P 500 target reflects their optimism about a soft landing, the potential of AI, and the historical patterns observed in similar market situations. However, market conditions are subject to change, and investors should carefully consider a variety of factors and perspectives before making investment decisions.
