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Goldman Sachs Raises S&P 500 Forecast for 2024

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Andrew R. Michaud

• December 18, 2023

Goldman Sachs has revised its S&P 500 forecast for next year, expressing even greater optimism. Chief U.S. equity strategist David Kostin has increased the target from 4,700 to 5,100, indicating an 8% potential upside from the current index level. The market closed last week at 4,719.19, just 1.6% below its record high on January 3, 2022.

In a recent report to clients, Kostin explained that the expectation of decelerating inflation and potential Federal Reserve easing will keep real yields low. Consequently, this would support a P/E (price/earnings) multiple greater than 19 times. Kostin's confidence stems from the significant gains seen in the S&P 500 and the Russell 2000 since late October. During this period, the S&P 500 and the Russell 2000 increased by 15% and 23% respectively, largely due to the drop in real rates from 2.5% to 1.7%.

Goldman Sachs' previous S&P 500 forecast for the end of 2024 assumed yields of 2.3% and a P/E multiple of 18 times. However, given the current market conditions, they have adjusted their outlook accordingly. With this updated projection, Goldman Sachs is closely aligned with other optimistic Wall Street forecasters such as Oppenheimer Asset Management and Fundstrat's Tom Lee. These strategists expect the S&P 500 to reach 5,200 by the end of next year.

Overall, sell-side strategists have an average target of 4,902 for the S&P 500 at the end of 2024. If market momentum continues in the coming months, Goldman Sachs may find itself in good company with its revised forecast.

Market Optimism Continues Despite Recent Volatility

The optimism in the market continues to build after the significant gains experienced in November and December. The Federal Reserve's plans for easing monetary policy have played a crucial role in driving these gains, with investors now expecting more than 150 basis points of easing in the coming year.

Analysts Challenge Dovish Reaction

However, some analysts are questioning whether the market's response to Powell's statements has been too dovish. In fact, one analyst suggests that the Fed could potentially slash rates by as much as 75%.

Upside Potential in Earnings

Goldman Sachs' Chief U.S. Equity Strategist, David Kostin, and his team are particularly optimistic about future earnings. They believe that their current consensus of 5% growth may be surpassed, noting that it already exceeds Wall Street's expectations. As a result, equities are now pricing in even more positive economic activity and demonstrating a robust outlook.

Favorable Macro Outlook for IPOs

In addition to the positive outlook for earnings, Kostin and his team also highlight the potential for a more favorable environment for initial public offerings (IPOs) in 2024. An improved macro outlook indicates that it may be easier to bring IPOs to market during this period.

No Fear of Increased Equity Issuance

Despite the potential for more equity issuance in 2024, Goldman Sachs' strategists do not believe this will hinder stock performance in the next 12 months. They anticipate that the lower cost of capital driving issuance will also boost buyback activity, thus offsetting any negative impact on equity supply.

Shifting from Money-Market Funds to Stocks

Goldman Sachs predicts that falling interest rates will likely prompt investors to shift some of their holdings from money-market funds to stocks. So far this year, $1.4 trillion has gone into money-market funds, while only $95 billion has been invested in U.S. equity funds.

Opportunities for Weaker Balance Sheets and Small Caps

Looking ahead, the strategists at Goldman Sachs expect that both improving growth and falling rates will benefit stocks with weaker balance sheets, particularly those sensitive to economic growth. They also note that historically, lower rates have been supportive of small-cap stocks.

In conclusion, despite recent volatility, the market remains optimistic and continues to reflect a positive economic outlook. The potential for further rate cuts and strong earnings growth are key drivers behind this optimism. As we enter 2024, the market may also experience an increase in IPOs, while falling interest rates could encourage a shift towards stocks. Investors should consider stocks with weaker balance sheets and small-cap stocks as potential opportunities in the coming months.