Goldman lowers official S&P 500 forecast and also evaluates what a recession would do to stocks

Published Sat, Feb 12 20228:40 AM ESTUpdated Sat, Feb 12 20228:49 AM EST

Goldman Sachs cut its target for the S & P 500 over the weekend, saying higher rates will crimp stock valuations. The bank also considered what different economic scenarios would do to the overall market. The bank lowered its official S & P 500 target to 4,900 from 5,100 previously. The new forecast represents just a minuscule 2.8% price return from where the benchmark ended 2021. However, the target is still 10% higher than Friday's close. "While our index EPS estimates remain unchanged, we adjust our valuation forecast following our economists' revisions to the path of interest rates," wrote the team led by David Kostin, chief U.S. equity strategist, in a note. "Since our November outlook, inflation has surprised to the upside." Stocks shuddered in the past week after the largest inflation increase since 1982 caused investors to fear the Federal Reserve may act more aggressively to raise interest rates. Goldman's economists raised their Fed forecast to seven hikes for 2022 following the hot CPI report . The 10-year Treasury yield jumped above 2% at one point in the past week and Goldman sees it hitting 2.25% this year. Higher rates should restrain how much investors will pay for each dollar of earnings from stocks, keeping a lid on market valuations. "The implied forward P/E multiple at year-end would equal 20x, roughly unchanged from the current level but below our previous forecast of 22x," wrote the team. In other words, Goldman believes the market's valuation will stay the same and so whatever gains left this year for stocks will come from earnings growth, not multiple expansion. What a recession would mean for stocks Goldman also considered three alternative macroeconomic scenarios, including a recession, which investors are "increasingly" asking about, according to the bank. Recession: Stocks would fall 24% from peak-to-trough as they usually do during economic contractions, the bank predicts. That means the S & P 500 would fall another 18% from current levels to 3,600. Inflation remains/Fed hikes more than expected: The S & P 500 would decline 12% to 3,900, the bank predicts. Inflation recedes/fewer Fed hikes: Stocks rally 24% from here with the S & P 500 hitting 5,500. These are not the baseline scenarios for the bank, however. Goldman still believes the market will recover from here and post a small gain for the year. The S & P 500 is down 7% year-to-date. "The macro backdrop this year is considerably more challenging than in 2021," the note stated. "However, we continue to expect that equity prices will rise alongside earnings and reach a new all-time high in 2022." — With reporting by CNBC's Michael Bloom .

Traders on the floor of the NYSE, Feb. 11, 2022.

Source: NYSE