Written by Louis Juric
Goldman Sachs lowered its target at the end of 2022 to 3,600 due to concerns about rising interest rates. The move followed 75 basis points of interest from the US Federal Reserve’s Open Market Committee on Wednesday and hawkish comments from Federal Reserve Chair Jerome Powell that raised interest rate hike expectations and caused further slippage in the major averages.
The bank believes that higher rates mean a lower valuation at the end of the year, and increased uncertainty is prompting a defensive stance.
One strategic analyst explained, “The expected path of interest rates is now higher than we previously assumed, which tends to tip the distribution of stock market results less than our previous forecast. The S&P 500 has already reached our previous year-end target of 4,300 in mid-August, but the price complex has The higher interest rate scenario we now include in our valuation model supports the 15x P/E multiple (vs. 18x previous forecast) and implies a year-end (3-month) S&P 500 target of 3600 (-5 %) and the 6-month and 12-month forecasts are 3,600 (-5%) and 4,000 (+6%).
Goldman Sachs said the outlook for US stocks is “extraordinarily murky,” with changing trajectories for inflation, economic growth, interest rates, earnings and valuations. Based on client discussions, the bank said most equity investors have taken the view that a hard landing scenario is “inevitable”.
We previously reported that in recessions, a decline in the S&P 500 EPS could bring the index down to 3150 (-17%). The 11% drop in EPS would be consistent with modest negative real GDP growth and a 13% average EPS decline during previous recessions. Under a ‘hard landing’ scenario, the yield gap will increase and the targets for the 3, 6 and 12-month S&P 500 will be 3400 (-10%) / 3150 (-17%) / 3750 (-1%). Strategist wrote.
In the near term, investors’ focus will shift from concerns about interest rates to the company’s earnings, as record profit margins will be under scrutiny.