Equity rotations recently are reflecting a downgrade for the growth outlook on the US economy, but the S&P 500 (SP500) remains near its all-time high because of anticipated interest-rate cuts by the Federal Reserve, according to Goldman Sachs.
The firm said in a Friday note it expects the Fed to cut its benchmark lending rate by 25 basis this week and by 200 basis points through Q1 2026, below market views for 260 basis points.
The team led by Chief US Equity Strategist David Kostin said it maintained its year-end S&P price target at 5600, adding 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 [Federal Open Market Committee] 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.”
Kostin’s team said the shift suggests the market is pricing real economic growth of around 3%, near Goldman economists’ 3Q 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 5090 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 25 basis-point cut this week, he added, Goldman economists anticipate two 25 basis-point cuts by the end of the year and four additional cuts of 25 basis points in 2025.
Kostin’s team rebalanced the firm’s sector-neutral Long (GSTHLDUR) and Short Duration (GSTHDSDUR) baskets. For GSTHLDUR, the firm added Choice Hotels International (CHH), Cava Group (CAVA), DoorDash (DASH), e.l.f. Beauty (ELF), Monster Beverage (MNST), Targa Resources (TRGP), 10x Genomics (TXG), Ionis Pharmaceuticals (IONS), Intra-Cellular Therapies (ITCI), Rollins (ROL) HEICO (HEI), Veraolto (VLTO), GE Aerospace (GE), Kyndryl Holdings (KD), Palantir Technologies (PLTR), Service Now (NOW), Monolithic Power Systems (MPWR), AppFolio (APPF), Teradata (TDC), Fortinet (FTNT), Gartner (IT), Sherwin Williams (SHW), Roku (ROKU), Pinterest (PINS), and Vistra (VST).
Meanwhile, Goldman additions to GSTSDUR include Kohl’s (KSS) PVH (PVH), Molson Coors Beverage (TAP), Kraft Heinz (KHC), Jazz Pharmaceuticals (JAZZ), CVS Health (CVS), Lennox International (LII), Oracle (ORCL), IPG Photonics (IPGP), BILL Holdings (BILL), Docusign (DOCU), Amkor Technologies (AMKR), Unit Software (U), Trimble (TRMB), Teledyne Technologies (TDY), United States Steel (X), Liberty Broadband Class C (LBRDK), AT&T (T) Warner Bros. Discovery Series A (WBD), and Brookfield Renewable (BEPC).
For investors looking to track the benchmark S&P 500 (SP500), here are some exchange-traded funds of interest: (VOO), (IVV) (RSP), (SSO), (UPRO), (SH), (SDS), and (SPXU).
