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Our View
Goldman Sachs raised its S&P 500 year-end 2024 price target to 5100, representing 8% upside from current levels. This outcome aligns with the scenario we outlined last week, where lower inflation and dovish Fed policy allow real yields to fall.
The new year-end 2024 target reflects a P/E greater than 19x — compared with Goldman’s prior target of 4700, which forecasts a multiple of 18x. The firm’s 3-month and 6-month targets are 4800 and 4900. From Goldman:
The bevy of encouraging economic data releases this week support our upwardly revised equity market outlook. The CPI and PPI reports this week both signaled that inflation is nearing the Fed’s target. Our economists expect that core PCE inflation will register just 3.1% year/year in November. In fact, by some measures the trend is already at or near 2%. Above-consensus retail sales growth further evidenced economic resilience, while lower-than-expected jobless claims affirmed that the labor market remains healthy.
Equities were already pricing positive economic activity but now reflect an even more robust outlook. The performance of cyclical vs. defensive stocks has moved from pricing GDP growth of 1.5% to above 3% during the last seven weeks. Our stronger view of the equity market also dovetails with our colleagues’ upgrades to the US GDP growth and interest rate outlooks.
Following the Fed’s dovish signaling, our economists now expect the FOMC will cut the policy rate sooner and faster than they previously anticipated. Their revised funds rate forecast assumes consecutive 25 bp cuts in March, May, and June followed by quarterly cuts that will place the policy rate at 4.0%-4.25% at year-end 2024. Futures prices currently imply a total of six cuts to 3.75%-4.0% by the end of next year.
Our interest rate strategists also revised their forecast to reflect the Fed pivot. They now expect the 10-year Treasury yield will fall to 3.75% in 1H 2024 (previously 4.65%) before rising to 4.0% at the end of next year (previously 4.55%), only 10 bps above the current level of 3.9%. The move in real yields has been particularly dramatic and strongly influences equity valuations. In October, the real rate equaled 2.5% but it has since plummeted to 1.7%. The yield gap between real rates and earnings yield now equals 350 bps. We forecast it will remain roughly at this level at year-end 2024.
We see upside risk to our above-consensus S&P 500 earnings estimate of 5% year/year growth in 2024. Our top-down EPS estimate of $237 compares with the median strategist estimate of $230. Financial conditions have loosened substantially.
For what it’s worth, I pushed my end-of-year price up to 4750, and then up to 4850 and there are a lot of positive seasonalities in January.