Goldman raises short-term market outlook, but thinks stocks will be stuck for the rest of the year

Published Mon, Feb 6 20239:31 AM EST

Goldman Sachs raised its 3-month S & P 500 target, but only to catch up with the market's strong start to 2023. The investment bank thinks the market will largely be stuck the rest of the year. David Kostin, Goldman's chief U.S. equity strategist, raised his 3-month S & P 500 target to 4,000 from 3,600, but kept his year-end forecast at 4,000. The S & P 500 is trading near a 5-month high of 4,100 after gaining about 8% to start 2023. "A soft landing — and in fact above-trend growth — is already priced in U.S. equities," Kostin explained in a client note. "Valuations are elevated vs. history and will be constrained by an eventual rise in interest rates. Even avoiding recession, earnings are unlikely to grow substantially in 2023." Stocks have rallied this year despite another Federal Reserve rate hike and poor earnings as investors bet on the economy avoiding a recession and inflation trends lower. .SPX YTD mountain S & P 500 so far in 2023 Goldman notes the outperformance of cyclical industries so far this year as evidence that a so-called soft landing is already priced in. The Consumer Discretionary Select SPDR is up 17% this year. Plus, the bank notes that the S & P 500 trades at 18.4 times forward earnings. "The current P/E multiple ranks in the 87th percentile since 1976," the note said. "Relative to real interest rates, the valuation of the S & P 500 ranks in the 84th percentile." And Goldman believes that earnings expectations are still too high, even in a soft landing scenario. The firm expects flat earnings growth this year and just 5% growth in 2024. So what are investors to do? "Alternatives to U.S. equities, including non-U.S. stocks, credit, and cash, offer superior risk-adjusted returns and are garnering assets," Kostin said. Goldman noted a 4.6% yield for many money market accounts, and 4.9% average yield for investment grade bonds. To be sure, Goldman still fears a recession is possible, which would cause the S & P 500 to fall back to the 3,150 level, the firm estimates. The debt ceiling fight also adds more risk this this year, Kostin said.