Goldman Sachs analysts have raised the year-end target for the S&P 500 Index for the third time this year, driven by expectations of further expansion in corporate profits and a stable macroeconomic outlook through 2025. David Kostin, the Chief U.S. Equity Strategist at Goldman Sachs, now forecasts the S&P 500 will reach 6,000 points by year-end, marking the second-highest target among Wall Street strategists.
Recently, the S&P 500 closed at 5,695.94 points, down by 0.96%, as traders adjusted their expectations regarding potential interest rate cuts by the Federal Reserve. Kostin's revised target suggests a potential return of around 5% for the remainder of the year. Previously, the S&P 500 year-end target was set at 4,700 points for 2024, then increased to 5,200 points in February, and further to 5,600 points in June.
Kostin has also raised the 12-month target for the S&P 500 from 6,000 to 6,300 points. The driving force behind this increase is the anticipated expansion in corporate profits. Kostin expects corporate sales to grow by 5%, aligning with nominal GDP growth, and now projects a 78 basis point increase in net profit margins by 2025, compared to the previous estimate of 24 basis points.
The assumptions are based on a "stable" macroeconomic outlook, with the U.S. real GDP expected to grow by an average of 2.3% in 2025 and 2.0% in 2026. On a micro level, Kostin highlights three reasons for the expected increase in corporate profits over the next year.
Firstly, certain S&P 500 component companies faced extraordinary expenses and write-downs in 2024, impacting profits, but this should ease by 2025. These include companies like Bristol-Myers Squibb, Gilead, and Warner Bros. Discovery.
Secondly, Kostin believes the recovery of the semiconductor cycle is likely to boost earnings per share for tech companies in 2025. The shipment of integrated circuits, a predictor of semiconductor profit margins, is currently about 10% below historical trends. A return to these trends is expected to expand profit margins by 2026.
Lastly, large tech companies are anticipated to continue achieving solid profit growth, partly thanks to the demand for AI technology. The recent Goldman Sachs Communication and Technology Conference indicated persistent robust demand for AI, which should benefit companies in this sector.
