Goldman Sachs has lowered its year-end target for the S&P 500 to 4,900 from 5,100.
While that still represents an 11% gain of from the recent level of 4,397 and a full-year return of 4%, there’s a chance things could get ugly, Goldman strategists, led by David Kostin, wrote in a commentary.
The reduction of the S&P 500 target results from the more hawkish stance adopted by the Federal Reserve in recent weeks, even though Goldman hasn’t reduced its earnings estimates.
“In November, when we published our year-end 2022 target of 5,100, our economists expected two Fed hikes in 2022 and a year-end nominal 10-year Treasury yield of 2%,” Kostin said
“However, inflation has been higher-than-expected, and our Fed policy outlook has
changed dramatically. Our economists now expect seven Fed hikes in 2022. Our interest rate strategists forecast the nominal 10-year Treasury yield will rise … to 2.25%.”
But given the uncertainty regarding inflation and Fed policy, Goldman sees three other possible outcomes, and two are bad.
“(1) If inflation remains high and prompts continued Fed hiking that lifts the terminal funds rate well beyond the market and our economists’ estimates, we expect … the S&P 500 would decline by 12% to 3900,” Kostin said.
“(2) Alternatively, if inflation recedes by more than expected this year and results in fewer Fed hikes, we expect … the S&P 500 would rise by 24% to 5500.
As for the worst scenario, “(3) Finally, if the U.S. economy tips into a recession – a question investors have increasingly been asking – the typical 24% recession peak-to-through price decline would reduce the S&P 500 to 3600.” That’s 18% below the S&P’s recent level.
