Equity Rotations Reflect Weaker Economic Outlook: Goldman Sachs
Recent equity rotations are reflecting a deterioration in the US economy’s growth prospects, but the S&P 500 remains near its all-time high due to anticipated interest rate cuts by the Federal Reserve, according to Goldman Sachs.
The firm stated in a note last week that it anticipates the Federal Open Market Committee (FOMC) to reduce its benchmark lending rate by 25 basis points on Wednesday and by 200 basis points through the first quarter of 2026. This estimate is lower than the broader market expectations of 260 basis points.
The team, which is led by chief US equity strategist David Kostin, has maintained its year-end S&P 500 price target at 5600. It has also stated that its rolled six-month and 12-month price targets are 5700 and 6000, respectively.
“With annualized inflation back near 2%, the focus of both investors and the FOMC has shifted towards the employment side of the Fed’s dual mandate,” Kostin said. “As a result of recent disappointing labor market reports, cyclical equities have lagged defensives by 9% since mid-July and 3% since the start of September.”
The shift suggests the market is pricing real economic growth of around 3%, noted the team, near Goldman economists’ third quarter real gross domestic product estimate of 2.5% and 2.3% for 2025.
According to the note, historically, the repricing of economic growth recently would have “implied a 7% decline for the S&P 500 and 6% decline in the equal-weight S&P 500 since mid-July, holding all else equal.” The S&P 500 is down 1%, and the equal-weight S&P 500 has added 1%, the note said.
Kostin said the economy did not enter a recession quickly during the five rate-cutting cycles since 1984, adding that the S&P 500 “typically returned +6% during the three months, +9% during the six months, and +17% during the 12 months after the first Fed cut.”
Since the levels of the Fed’s possible easing has already been priced by the market, he said, “history may not be the most useful guide for the forward path of equities today.” In addition to the expected quarter-point cut, he added, Goldman economists anticipate two quarter-point cuts by the end of the year and four additional quarter-point cuts in 2025.