Provided there are no more economic surprises, stocks are unlikely to face a crash in the near term and the S&P 500 could return to 4,000.
This is according to a team of strategists at Goldman Sachs led by David Kostin. The team raised their three-month SPX target,
That has jumped more than 7% so far this year, to 4,000 from 3,600. But Goldman left its year-end forecast at 4,000, roughly in the middle of Wall Street’s forecast target range of 3,400 to 4,500.
Explaining the near-term optimism in a note to clients late Friday, Costin, senior US equity analyst at Goldman Sachs GS, said,
He said resilient US macro data has outperformed an “unspectacular” fourth-quarter reporting season so far. Some would say US data is somewhat resilient after Friday’s employment report showed massive job growth of more than half a million, much stronger than expected, weighing on US stocks again on Monday, with the S&P 500 hovering at 4101.
Adding to that positive economic picture for the US was the earlier-than-expected reopening of China and reduced chances of a recession in Europe, the team said, noting that the still-light institutional situation means the market could temporarily exceed their bank’s target of 4,000.
But the strategists drew a line under that glee, noting that since a soft economic downturn has already been priced into US stocks, their end-of-year goal is to stay where it was for the time being. They noted that the outperformance of cyclicals versus defenses means US real economic growth of 2% versus the below-trend Goldman forecast of 1% of GDP in 2023, and the ISM Manufacturing Index at around 55 versus the last 47 reading.
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The bank has forecasts for basic earnings per share at 0% for 2023 and 5% for 2024, against consensus figures of 1% and 12%, respectively. Analysts’ forecasts, which have fallen 10% since the end of June 2023, are double the historical pace of negative reviews, said analysts.
Costin and the team said the valuations are already stretched and will be constrained by the eventual rise in interest rates. The S&P 500 is trading at 18.4 [times] forward earnings, and a higher ‘effective’ multiple if one takes into account the fact that most investors seem to expect earnings well below analyst estimates.”
Kostin and the team said stocks could digest higher interest rates if that change is driven by an improving growth outlook. But they don’t see further expansion in value as Treasury yields continue to rise — they see 10-year nominal yields TMUBMUSD10Y,
It gradually rises to 4.2%.
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They warned that since their underlying case for the S&P 500 already has limited upside, a recession could lead to a “significant drop” for stocks. They say the index could fall as much as 25% from current levels, to land at around 3,150 under that scenario, driven by lower earnings estimates and a drop in the price-to-earnings multiple to 14 times from 18 currently.
Another risk is that inflation continues to slow but fails to approach the Fed’s target, which could lead to a tightening of monetary policy and a hike in interest rates. Finally, they remind investors that the debate over the US debt ceiling, which could come later this year, has the potential to damage stocks as it did in 2011, when the market fell 17%.
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