S&P 500 Targets Have Already Been Raised by Goldman Sachs Before the New Year Begins

Freshly inked Goldman Sachs S&P 500 predictions for the upcoming year quickly underwent a bullish revision, as Chief U.S. Equity Strategist David Kostin raised the target from 4,700 to 5,100, reflecting an 8% potential upside from the current index level. This adjustment follows a 2.49% climb in the S&P 500 last week, concluding at 4,719.19, a mere 1.6% shy of its record high on January 3, 2022.

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In a report published late Friday, Kostin and his team conveyed their outlook, stating that decelerating inflation and anticipated Federal Reserve easing would maintain real yields at lower levels, supporting a P/E (price/earnings) multiple exceeding 19 times. Kostin highlighted the recent performance of the S&P 500 and the Russell 2000, which gained 15% and 23%, respectively, since late October. During this period, real rates dropped from 2.5% to 1.7%. Comparatively, the prior 2024-end S&P 500 forecast from Goldman Sachs factored in yields of 2.3% and a P/E of 18 times.

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The revised Goldman Sachs S&P 500 target aligns with some of the more optimistic forecasts on Wall Street, with strategists at Oppenheimer Asset Management and the perennially bullish Tom Lee of Fundstrat envisioning a rally to 5,200 by the end of the next year. Sell-side strategists collectively project an average S&P 500 target of 4,902 for the close of 2024, suggesting that Goldman Sachs is in esteemed company should market momentum persist.

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The prevailing optimism is grounded in the S&P 500's robust 8.9% gain in November and a 3.3% rise in December thus far. Expectations of Federal Reserve easing have been pivotal in propelling these gains, with the market anticipating over 150 basis points of easing in the coming year.

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Kostin and his team see further upside potential to their earnings per share consensus of 5% growth, which already exceeds Wall Street consensus. They assert that equities, having already factored in positive economic activity, now reflect an even more robust outlook. An enhanced macroeconomic landscape also suggests a favorable environment for introducing initial public offerings (IPOs) throughout 2024.

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The potential for increased equity issuance in 2024 is not anticipated to impede stock performance over the next 12 months, according to Goldman Sachs. They posit that the lower cost of capital driving issuance would simultaneously boost buyback activity, mitigating the net effect on equity supply.

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Falling interest rates may prompt a shift in investor allocations toward stocks, particularly after a significant influx of $1.4 trillion into money-market funds year-to-date, compared to a relatively modest $95 billion for U.S. equity funds, according to Goldman Sachs.

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Looking ahead, the strategists emphasize that both improving growth and declining rates are conducive to supporting stocks with weaker balance sheets, particularly those sensitive to economic growth. Additionally, historically, lower rates tend to be supportive of small-cap stocks.