(Bloomberg) — Goldman Sachs Group Inc . cut its year-end target for the S&P 500 to 3,600 from 4,300, arguing that a dramatic shift in the outlook for interest rate hikes will weigh on U.S. stock valuations.
Read more from Bloomberg
The higher interest rate scenario in Goldman’s valuation model supports a price-to-earnings multiple of 15 times, up from 18 times previously, strategists David J. Kostin wrote in a note Thursday. “Our economists now forecast that the FOMC will raise the benchmark rate by 75 bps in November, 50 bps in December and 25 bps in February for a top funds rate of 4.5%-4.75%.”
Goldman said the risks in its latest forecast are still tilted to the downside due to the growing odds of a recession, a scenario that would reduce corporate earnings, widen the yield gap and push up the benchmark income index. US variable to a low of 3,150. Federal Reserve Chairman Jerome Powell has indicated he would risk a recession to fight inflation, prompting fears that central banks could derail global growth.
Equity valuations and real yields have moved steadily over the past few years, but that relationship has recently been disrupted, posing a risk to stocks, the US investment bank said. It had previously assumed that real rates would end 2022 at about 0.5%, compared with an assumption of 1.5% now.
Most equity investors have taken the view that a hard landing scenario is inevitable and are focusing on the timing, magnitude and duration of a potential recession, Kostin and his colleagues wrote. Within that framework, the S&P 500’s 3-, 6- and 12-month targets come in at 3,400, 3,150 and 3,750, respectively, they said.
Of course, the S&P 500 has underperformed the Stoxx Europe 600 index since Sept. 12, when Kostin and his team said they saw the US as a safer bet than Europe. They also say a year-end rally in the US equity index to 4,300 is possible if inflation shows clear signs of easing.
Goldman’s new core target implies a 4.2% decline in the benchmark US equity index since Thursday’s close. He anticipates 6- and 12-month goals for the meter of 3,600 and 4,000, respectively.
The US bank, like many of its peers, advises that heightened uncertainty calls for a defensive stance on the part of investors and that they should own stocks with quality attributes such as strong balance sheets, high returns on capital and stable earnings growth. sales
(Add additional comments starting in the fifth paragraph.)
Read more from Bloomberg Businessweek
©2022 Bloomberg LP
