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All You Had To Do Was Stay

This report provides Goldman Sachs’ outlook for the US equity market in 2024. Their baseline forecast is that the S&P 500 index will end the year at 4700, representing a 5% price gain from current levels and a total return of 6% including dividends.

Macroeconomic and Earnings Forecast

Goldman Sachs’ economists forecast that the US economy will continue expanding at a modest pace of 2.1% in 2024 and avoid a recession. Their view is above the consensus forecast of 1.0% growth. They assign only a 15% probability of a recession starting in the next 12 months, well below the consensus of 55%.

Given the benign economic outlook, Goldman Sachs forecasts that S&P 500 earnings per share (EPS) will grow 5% in both 2024 and 2025. Excluding financials, real estate, and utilities, they expect revenues to increase 5% in line with nominal GDP growth, while margins expand modestly. Their EPS forecasts of 250 in 2025 are above the consensus top-down estimate but below bottom-up analyst estimates, which assume more significant margin expansion.

Valuation Outlook

Goldman Sachs expects the Fed will remain on hold until late 2024 despite solid economic growth, versus market pricing of rate cuts beginning in mid-2024. Their rates strategists forecast 10-year Treasury yields of 4.6% by end-2024.

Goldman Sachs’ valuation model suggests the S&P 500 currently trades at fair value based on fundamentals and relative to interest rates. They forecast the aggregate index trading at a forward P/E of 18x by end-2024, in line with current levels. They expect the yield gap between equities and real yields to rise slightly but remain narrow.

S&P 500 Price Target and Return Scenarios

Based on the macroeconomic, earnings, and valuation outlook, Goldman Sachs’ baseline forecast is for the S&P 500 to end 2024 at 4700, representing a total return of 6%. However, they discuss several alternative scenarios:

  • Faster growth and lower yields could push the index to 5000 (+11%)
  • Slower growth and higher yields could see it fall to 4150 (-8%)
  • A mild recession could drop the S&P 500 to 3700 (-18%)

They note returns are typically higher in presidential election years, averaging 8% historically versus their 6% baseline forecast. Returns are also usually stronger in the second half of the year.

Concentration and Mega-Cap Tech Performance

The report discusses the massive outperformance of mega-cap tech stocks, known as the “Magnificent 7”, in 2023. Goldman Sachs expects these stocks to continue outperforming in 2024 given stronger growth profiles, but the risk/reward is not attractive at current elevated expectations.

They decompose the index into the aggregate S&P 500 and equal-weight S&P 500 to account for concentration. While the aggregate is forecast to grow EPS faster at 11%, the difference with the equal-weight index is smaller at just 3 percentage points.

Money Flow and Demand Factors

Goldman Sachs forecasts households, pension funds, and mutual funds will be net sellers of US equities in 2024 as higher yields draw allocations to bonds and cash. Corporations, through buybacks and M&A, are expected to be the largest source of equity demand at $550 billion of net purchases. Foreign investors may also be net buyers.

Recommended Investment Strategies

Given the outlook for modest returns, Goldman Sachs recommends tilting portfolios toward “quality” stocks, owning growth stocks with high returns on capital, and buying cyclicals that have lagged if economic data surprises to the upside versus consensus expectations. They advise investors to stay invested through volatility around economic, financial, political and geopolitical events in 2024.

In summary, Goldman Sachs forecasts the S&P 500 will end 2024 at 4700, representing a total return of 6% based on continued economic and earnings growth. However, they note alternative scenarios could see returns ranging from -8% to +11% depending on the interest rate and growth environment.