Goldman Cuts S&P 500 Year-End Target

Goldman Sachs note that “the expected path of interest rates is now higher than we previously assumed, which tilts the distribution of equity market outcomes below our prior forecast. The higher interest rate scenario that we now incorporate into our valuation model supports a P/E of 15x (vs. prior forecast of 18x) and implies a year-end (3-month) S&P 500 target of 3600 (-5%) and 6-month and 12-month forecasts of 3600 (-5%) and 4000 (+6%).”

• “The outlook is unusually murky. The forward paths of inflation, economic growth, interest rates, earnings, and valuations are all in flux more than usual with a wider distribution of potential outcomes. Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook.”
• “An 11% drop in EPS would be consistent with modestly negative real GDP growth and the 13% median EPS drop during prior recessions. Under a "hard landing" scenario, the yield gap would rise and the 3-, 6-, and 12-month S&P 500 targets would be 3400 (-10%) / 3150 (-17%) / 3750 (-1%).”
• “In the near term, investor focus will soon turn from valuation to earnings. The analogue for stock investors is Q3 earnings season where record high profit margins will be under scrutiny.”