- The stock market has more room to fall if the economy enters a recession, according to Goldman Sachs.
- The bank lowered its year-end price target for the S&P 500 for the third time this year to 4,300.
- Slower economic growth and higher-than-expected interest rates fueled Goldman’s market call.
The S&P 500 will continue its decline to 3,600 if an economy
materialize sometime over the next year, Goldman Sachs said in a note on Friday.
The bank lowered its year-end price target for the S&P 500 for the third time this year to 4,300, representing a potential 8% increase from current levels. Goldman’s initial 2022 price target for the S&P 500 was 5,100, which was later lowered to 4,900 in February. His target price was subsequently lowered again in March to 4,700.
Despite the dovish optimism, Goldman still expects corporate earnings to grow 8% in 2022, up from its previous forecast of 5%. Goldman’s year-end price target for the stock market assumes that a recession does not materialize and implies that the price-earnings ratio for the broader market remains unchanged at 17x.
In a recession, which Goldman assigns a 35% chance of occurring in the next two years, the bank expects the S&P 500 price-to-earnings valuation multiple to decline to 15 times, which would boost large part of the downside of stocks.
Much of Goldman’s price target cut for the S&P 500 focuses on interest rates, which remain higher than the bank expected just a couple of months ago. Goldman expects the 10-year US Treasury yield to end 2022 at around 3.3%, which is a big jump from its previous estimate of 2.7%. The 10-year US Treasury yield currently stands at 2.90% and investors expect the Fed to raise the fed funds rate by another 100 basis points this summer.
If the economy is able to avoid a recession, there is still a downside scenario in which rising interest rates lower valuations despite rising corporate profits.
“If the Fed is forced to hike higher than our economists expect and real rates rise to 1%, similar to the peak reached during the last cycle in 2018, our macro model suggests higher rates will more than make up the gap.” lower yield, Goldman said.
To navigate the growing uncertainty and various potential outcomes, Goldman recommends investors stick to high-margin growth stocks relative to their low-margin peers.
“Growth stocks have dropped sharply so far this year as financial conditions have tightened. However, high-margin growth stocks currently trade at the same 5x enterprise sales-value multiple as their low-margin peers.” margin. We expect multiples to diverge as investors prioritize yield.” Goldman said.