Goldman cuts its target for the S&P 500 and sees a 4% drop ahead

  • Goldman Sachs on Friday lowered its year-end target for the S&P 500 index to 3600 from 4300.
  • The bank said the Fed’s aggressive approach to taming inflation will weigh on stocks.
  • The benchmark US stock index fell nearly 21% as higher interest rates led to a sell-off.

Goldman Sachs cut its year-end target for the S&P 500, predicting the US stock index will fall 4.2% as the Federal Reserve sticks to its tight tightening.

Wall Street lowered its three-month benchmark target from 4,300 to 3,600, and warned that the US central bank’s rapid pace in raising interest rates would likely lead to more stock selling before the end of 2022.

“The expected trajectory of interest rates is now higher than we previously assumed, tilting the distribution of stock market results lower than our previous expectations,” the bank’s strategic analysts said in a note to clients on Thursday.

“The S&P 500 did indeed reach our previous year-end target of 4,300 in mid-August, but the price pool subsequently shifted significantly,” added the team, led by chief US equity strategist David Kostin.

US stocks fell after the Federal Reserve on Wednesday raised interest rates by a significant 75 basis points for the third time in a row. The S&P 500 closed 0.84% ​​lower at 3,757.99 Thursday, and is down 16.8% since hitting 4,300 in mid-August.

Investors are concerned about rising interest rates due to their potential impact on economic growth.

The Goldman Sachs team warned that the S&P 500 could drop to 3,400 if earnings for its listed companies fall and the Fed’s attempts to curb hyperinflation lead to a “hard landing”, as the US suffers a recession.

“The outlook is extraordinarily ambiguous. Future trajectories of inflation, economic growth, interest rates, earnings and valuations are all in more flux than usual, with a wider distribution of potential outcomes,” they said.

But in the near term, Goldman Sachs expects investors to shift their focus to corporate profits. In the third-quarter earnings season, her team said, record profit margins will be closely scrutinized.

Goldman Sachs said equity investors have moved closer to the view that a hard landing for the US economy is inevitable, based on discussions with clients.

“Most portfolio managers believe that in order to control inflation, the Fed will have to raise interest rates enough that it triggers a recession in the US at some point during 2023,” Kostin’s team said.

The bank’s strategic analysts said the rate hike scenario suggests that the S&P 500 will remain at 3,600 in six months, but should rise by 6% to 4,000 in 12 months.

Goldman Sachs expects another 75 basis points increase at the Federal Reserve’s meeting in November, followed by a 50 basis point rise in December. A 25 basis point rise in February means policy makers are aiming to raise interest rates to between 4.5% and 4.75%.

Read more: Goldman Sachs says if the Fed misses a soft landing, don’t expect rate cuts until something goes wrong

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