Goldman Sachs: US economic outlook downgraded, Fed rate cut expectations still supporting the stock market
Goldman Sachs lowered the outlook for the US economy, but the S&P 500 index remains near historical highs due to expectations of a rate cut by the Federal Reserve. It is expected that the Fed will cut rates by 25 basis points this week, with a total cut of 200 basis points by 2026. The year-end target price for the S&P 500 remains at 5600 points, with 6-month and 12-month target prices at 5700 points and 6000 points respectively. Costin pointed out that the market expects economic growth to be around 3% and mentioned the positive impact of rate cuts on the stock market historically
According to the Wisdom Financial APP, Goldman Sachs stated that the recent rotation in the stock market reflects a downgrade in the US economic growth outlook. However, due to the expected rate cut by the Federal Reserve, the S&P 500 index is still close to its historical high.
In its report last Friday, the company stated that it expects the Federal Reserve to cut the benchmark interest rate by 25 basis points this week and by 200 basis points by the first quarter of 2026, lower than the market's expectation of 260 basis points.
Led by David Kostin, the Chief US Equity Strategist, the team maintained the year-end target for the S&P 500 index at 5600 points and added that the 6-month and 12-month targets are 5700 points and 6000 points, respectively.
Kostin stated, "With annualized inflation returning to near 2%, the focus of investors and the Federal Open Market Committee (FOMC) has shifted to the employment aspect of the Fed's dual mandate." "Due to the recent disappointing labor market reports, cyclical stocks have underperformed defensive stocks by 9% since mid-July and by 3% since early September."
Kostin's team indicated that this shift suggests that the market expects actual economic growth to be around 3%, close to Goldman Sachs economists' expectations of 2.5% GDP growth in the third quarter and 2.3% growth in 2025.
According to the report, the recent repricing of economic growth historically "means that the S&P 500 index has fallen by 7% since mid-July, and the S&P 500 equal-weight index has fallen by 6% under unchanged conditions."
Kostin mentioned that in the five rate-cut cycles since 1984, the US economy did not quickly enter a recession. He added that the S&P 500 index "typically has a return of 6% in the three months after the first rate cut by the Fed, 9% in six months, and 17% in twelve months."
He stated that since the market has already priced in the potential extent of Fed easing, "history may not be the most useful guide to the current stock market trend." He added that besides the 25 basis point rate cut this week, two more 25 basis point cuts are expected by the end of this year, and four more in 2025