The Federal Reserve's aggressive interest rate hikes will weigh on stocks, the bank said.
- Goldman Sachs on Friday slashed its end-of-year target for the S&P 500 to 3,600 from 4,300.
- The Fed's aggressive approach to taming inflation will weigh on stocks, the bank said.
- The benchmark US stock index has fallen about 21% as rising interest rates drive a selloff.
Goldman Sachs has cut its year-end target for the S&P 500, predicting the benchmark US stock index will fall 4.2% as the Federal Reserve sticks to its aggressive tightening.
The Wall Street bank dropped the benchmark's three-month target from 4,300 to 3,600, and warned that the US central bank's fast pace of interest rate hikes will likely lead to further stock selloffs before the end of 2022.
"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 bank's strategists said in a note to clients Thursday.
"The S&P 500 index actually reached our previous year-end target of 4,300 in mid-August, but the rate complex has subsequently shifted dramatically," added the team, led by chief US equity strategist David Kostin.
US stocks slipped after the Fed on Wednesday hiked interest rates by an outsized 75 basis points for the third time in a row. The S&P 500 closed 0.84% lower at 3,757.99 on Thursday, and has slumped 16.8% since hitting 4,300 in mid-August
Investors have fretted about the interest rate hikes because of their potential impact on economic growth.
The Goldman Sachs team warned the S&P 500 could fall as low as 3,400 if earnings of its listed companies decline and the Fed's attempts to curb red-hot inflation lead to a "hard landing", where the US suffers a recession.
"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," they said.
But in the near term, Goldman Sachs expects investors will turn their focus to corporate earnings. In the third-quarter earnings season, record-high profit margins will be closely examined, its team said.
Stock investors have come round to the view that a hard landing for the US economy is inevitable, Goldman Sachs said, based on discussions with clients.
"Most portfolio managers believe that in order to corral inflation, the Fed will have to hike rates sufficiently high that it will result in a US recession at some point during 2023," Kostin's team said.
The bank's strategists said its higher interest rate scenario implies the S&P 500 will still be at 3,600 in six months, but should rise 6% to 4,000 in 12 months.
Goldman Sachs expects another 75 basis point hike at the Fed's November meeting, followed by a 50 basis point rise in December. A hike of 25 basis points in February means policymakers are aiming to raise interest rates to between 4.5% and 4.75%.