Looming Fed rate cuts fuel new bullish S&P 500 projections

Goldman Sachs raised its three-month return projections for the S&P 500 to slightly over 3%, the expected six-month return to +6%, and the twelve-month gain to over 11%. Analysts from the Wall Street bank said they are targeting 6.4K, 6.6K, and 6.9K index levels, respectively. 

According to Goldman analysts, the Fed easing is forecasted to start in September, and the likelihood of a higher-than-expected performance by large-cap companies in the tech sector was the key driver of their revised outlook.

The analysts also claimed that recent corporate surveys and inflation figures suggested a less-than-expected tariff-driven impact on consumers. However, they cautioned that the effects of Trump’s tariffs could be gradual, even as large caps stocked up their inventories in anticipation of the increasing impact of tariff rates.   

Goldman maintained its +7% earnings-per-share growth projection for the S&P 500 in 2025 and 2026 but said it would reassess the estimates after considering Q2 earnings. It also added that there was an upside and downside risk despite the predicted slowdown in PCE inflation to 2.3% and the probable decrease of a U.S. recession to 35%.

The broker emphasized that higher corporate earnings, eased trade tensions, and the effects of short-term rate cuts could be key drivers of this upward trajectory in the stock market. The analysts’ report published on Monday noted that Fed cuts of 25 basis points were also expected in the next three consecutive meetings.

Goldman analysts imply a 6.9K S&P 500 index level peak

The analysts raised the targeted 12-month S&P 500 index level from 6.5K to 6.9K, claiming that lower bond yields than previously projected and the willingness of investors to look through the weakness of short-term earnings were the core reasons behind this revision.

The expected year-end level for the six-month index level also increased from 6.1K to 6.6K, while the three-month level rose from 5.9K to 6.4K. However, the analysts pointed out that they expected “near-term rotations” to the estimates “below the surface of the index” following what they referred to as a “narrow breadth rally.” 

The bank’s analysts also mentioned that the “median constituent” remained over 10% below its 52-week ATH, adding that they believed in a likelihood of a “catch up” rather than a “catch down.”

The market is expected to grow in the next couple of months as the analysts recommended investments at the beginning of the second half of the year. Particularly, they suggested a balanced allocation in several sectors, citing potential gains in Software & Services, Real Estate, Utilities, Materials, Media & Entertainment, and Alternative Asset Managers.

The forecasted “forward price-to-earnings ratio” for the S&P 500 also jumped to 22, up from 20.4.

Goldman strategists previously lifted the three-month index level target to 5.9K in May, saying that relaxing trade tensions between the U.S. and China favored the projection despite looming uncertainties. The upgrade, just like the recent one, followed a rally on Wall Street as U.S.-China negotiators agreed to a temporary tariff “ceasefire.”

Kostin’s team saw less than a 1% gain from levels at that time, implying that the advance on Wall Street is likely to stagnate.

Kostin says Fed rates are more crucial for stocks

In June, the U.S. equity strategist said that bond yield levels are not as critical for stocks as the factors affecting the Fed’s interest rates. The rise in interest rates affects stocks by reducing the earnings of companies and limiting the potential growth scope for stock valuations. However, they added that the vulnerability of stocks to increasing Fed rates also depends on some reasons for rising yields.

The team also pointed out that declining recession risk, U.S. government debt concerns, and high lending costs increased yields for U.S. bonds. The increase in yields on U.S. bonds was previously driven by reduced recession risk and declining tensions in international trade.

“Equities typically appreciate alongside rising bond yields when the market is raising its expectations for economic growth, but struggle when yields rise due to other drivers, like fiscal concerns.”

–David Kostin, Chief Strategist at Goldman Sachs 

Goldman’s strategists expected bond yields to remain unchanged in 2025, and the Fed to complete its cycle of rate cuts in June next year, with its policy rates ranging between 3.5% and 3.7%.

Kostin’s team claimed that although many investors are still not fully convinced, they pointed out that 5% nominal yields could be the tipping point for U.S. stocks.