Goldman Sachs issues stocks forecast for next year

After hitting a record high July 16, the stock market, as measured by the S&P five hundred index, has stalled.

So the massive question on investors’ minds is where stocks head from here. It’s easy to make a case on either the bullish or bearish side.

Bulls cite earnings as backing up their case. Earnings per share for the S&P five hundred soared eleven.3% within the 2d quarter from a year earlier, in line with FactSet. While analysts predict earnings growth to decelerate to four.9% within the 1/3 quarter, this still a really good number.

But bears say that with economic growth slowing, that’s an overestimate. GDP expanded by an annualized 1.four% within the 2d quarter, slowing from 3% within the first.

To be sure, bulls are quick to indicate that the Atlanta Federal Reserve bank forecast model shows economic growth rebounding to three% this quarter.

The reality is, bears contend that stocks are over priced after the S&P five hundred’s 26% gain over the past 300 and sixty five days.

As of Sept. 13, the S&P five hundred stood at 20.9 times analysts’ estimate of constituent companies’ earnings for the subsequent 300 and sixty five days. That’s well above the 5-year average of 19.four and the ten-year average of 18.Zero.

Impact of Fed rate cuts on stocks

Meanwhile, investors’ views are mixed regarding what a Sept. 18 interest-rate cut by the Federal Reserve would mean for stocks. Some experts predict the Fed to cut rates by 25 basis points (a quarter percentage point), and others predict 50 basis points (one-1/2 percentage point).

argue that a smaller cut is good for stocks because it shows the Fed doesn’t think the economy is in big trouble.

Related: Former Fed official unveils bold Fed rate prediction for this week

Or that you're ready to argue that it’s bad for stocks because a smaller reduction will stimulate the economy less, thereby boosting earnings less.

As for a bigger rate decrease, that you're ready to argue it’s good for stocks because it can possibly lift the economy more. Or that you're ready to argue that it’s bad for stocks because it indicates the Fed thinks the economy is in peril of a recession.

Goldman Sachs sees quarter-point Fed rate cut

Goldman Sachs strategists are mildly bullish on stocks. Investors have recently shed mega-cap technology stocks in favor of left out sectors just like consumer staples and real estate, they note.

That “reflects a downgrade to the market’s outlook for economic growth,” they wrote in a commentary. “But it surely the chance of Fed easing has left the S&P five hundred near its all-time high. The S&P five hundred stood at 5,628 Tuesday, not up to 1% removed from its record July 16 close of 5,667.

Related: Major research firm unveils stock market forecast for Q4

Goldman economists forecast the Fed will cut rates by 25 basis points Wednesday, and that they project 200 basis points of easing throughout the first quarter of 2026.

“But it surely the trajectory of [economic] growth is a more important driver for stocks than the speed of rate cuts,” the strategists said.

Goldman Sachs S&P five hundred forecast is "higher"

They addressed a couple of different scenarios for stocks. “If the market prices less Fed easing since the economy proves resilient, equities will upward thrust despite higher bond yields,” Goldman Sachs said.

Higher yields often hurt stocks because they're inclined to depress economic growth, and that they make bonds more competitive against stocks as an investment.

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“In contrast, if the market prices additional Fed easing because economic data worsen, equities will struggle while bond yields decline,” the strategists said. Falling yields are inclined to supply a boost to stocks because they lift earnings.

The final analysis is, "With [price-earnings] multiples flat, earnings growth will lead the S&P five hundred modestly higher,” they said.

Goldman strategists predict the S&P five hundred will end the year at 5,600. They've a six-month target of 5,Seven-hundred and a 12-month target of 6,000. The latter represents a 7% gain from Tuesday’s level.

Related: Veteran fund manager who correctly forecast stock drop updates outlook