Goldman Sachs gets bullish ahead of growth cycle
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Goldman Sachs is raising its year-end price target for the S&P 500, even as it has trimmed expectations for corporate earnings growth.
- The call is based on earlier and deeper interest rate cuts from the Federal Reserve, corporate resilience, lower bond yields and investor positioning (aka vibes).
Why it matters: Investing for an environment priced for an economic expansion looks very different than investing to hedge against potential weakness.
What they're saying: David Kostin, chief U.S. equity strategist for Goldman Sachs, tells Axios cyclical stocks are implying economic growth of 3%.
- "When investors believe the economy is rallying…the cyclicals outperform the defensives a lot," he says.
Zoom in: In terms of sector performance, Kostin is bullish on three things.
- Software and services, which he sees being bolstered by the expansion of artificial intelligence and application software.
- Alternative asset managers, as the major banks have rallied "a lot, but the alternative asset managers have not," he says, noting these firms could continue to benefit from an improved capital markets backdrop.
- Companies with high floating rate debt, which would benefit from lower bond yields and lower interest rates.
Zoom out: Goldman chief economist Jan Hatzius sees three rate cuts this year off the back of economic growth, combined with cooling inflation that allows the Federal Reserve to cut rates.
- Stagflation isn't a concern because tariffs will be a one-time inflation hike, according to Kostin. "No recession, equity prices rally, that is our baseline."
Yes, but: There are still downside risks, especially given the market is pricing for a level of growth that doesn't align with the latest GDP data.
- Just because the market is pricing for economic growth doesn't mean it's guaranteed, Kostin notes. On tariffs, he says we still need clarity on who's paying them to be confident in broad earnings.
- The thin market rally could be an issue, with Kostin adding this is "one of the narrowest drivers of a rally in the last 50 years outside of recession."
The bottom line: Kostin says a catch-up trade is more likely than not, and he expects the market rally to broaden.
