Soft landing already priced in, S&P 500 upside limited from here - Goldman Sachs

February 6, 2023 7:02 AM EST
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David Kostin, Goldman Sachs chief U.S. equity strategist, has hiked the broker’s 3-month S&P 500 price target to 4000 from 3600, citing an improvement in U.S. and global macro data.

However, the firm’s top equity strategist believes the index has a limited upside from current levels given that a soft landing is already priced in. In his weekly note to clients, the strategist discussed several factors that are likely to limit the upside for U.S. equities.

“S&P 500 is unlikely to end the year substantially above our year-end target of 4000,” Kostin said.

In addition to a soft landing already being priced in the equity market, Kostin also highlights “elevated” valuations.

“While multiples have already been resilient as yields have climbed, we believe that substantial further valuation expansion will be unlikely as Treasury yields rise further.”

Moreover, Kostin believes that S&P 500 EPS is unlikely to grow much this year even in the case of the Fed managing to deliver a soft landing. Finally, the debt ceiling represents a potential risk to U.S. equities later this year, Kostin added.

“The combination of limited upside in our base case and substantial downside risk if the economy dips into recession makes for a challenging distribution of outcomes for US equity investors, especially relative to the alternatives,” Kostin concluded.

He reiterated his previous stance that the S&P 500 is likely to contract to 3150 in a recession scenario, which implies a downside risk of about 25% from current levels.

By Senad Karaahmetovic

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