Goldman lowers S&P 500 target, sees 4% drop ahead

  • Goldman Sachs lowered its year-end target for the S&P 500 from 4,300 to 3,600 on Friday.
  • The Fed’s aggressive approach to curb inflation will weigh on equities, the bank said.
  • The US benchmark stock index is down about 21% as rising interest rates trigger a sell-off.

Goldman Sachs has lowered its year-end target for the S&P 500 and predicts the US benchmark index will fall 4.2% as the Federal Reserve continues its aggressive tightening.

The Wall Street bank lowered the benchmark’s three-month target from 4,300 to 3,600 and warned that the rapid pace of rate hikes by the US central bank is likely to lead to further sell-offs in equities before the end of 2022.

“Interest rate expectations are now higher than we previously assumed, bringing the distribution of stock market results below our previous forecasts,” the bank’s strategists said in a note to customers on Thursday.

“The S&P 500 index reached our previous target of 4,300 by the end of the year in mid-August, but the interest rate complex has since shifted dramatically,” added the team, led by US equity strategist David Kostin.

US stocks fell after the Fed hiked interest rates by 75 basis points for the third consecutive time on Wednesday. The S&P 500 closed 0.84% ​​lower on Thursday at 3,757.99 and is down 16.8% since reaching 4,300 in mid-August.

Investors were concerned about the rate hikes because of their potential impact on economic growth.

The Goldman Sachs team warned that the S&P 500 could fall to 3,400 if the profits of its publicly traded companies fall and the Fed’s attempts to curb red-hot inflation lead to a “hard landing” where the US enters a recession .

“The outlook is unusually murky. The forward paths of inflation, economic growth, interest rates, earnings and valuations are all fluctuating more than usual, with a wider spread of potential outcomes,” they said.

But in the near term, Goldman Sachs expects investors to turn their attention to corporate earnings. Record-high profit margins will be scrutinized in the third quarter earnings season, the team said.

Equity investors have concluded that a hard landing for the US economy is inevitable, Goldman Sachs said based on talks with clients.

“Most portfolio managers believe that to keep inflation in check, the Fed will have to raise interest rates so high that it will lead to a recession in the US sometime in 2023,” Kostin’s team said.

The bank’s strategists said the higher interest rate scenario implies the S&P 500 will still be at 3,600 six months from now, but should rise 6% to 4,000 within 12 months.

Goldman Sachs expects another 75 basis point increase at the Fed’s November meeting, followed by a 50 basis point increase in December. An increase of 25 basis points in February means policymakers aim to raise interest rates to between 4.5% and 4.75%.

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

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