Goldman Sachs analysts have expressed renewed optimism for the U.S. stock market, stating that risk appetite has returned following a brief period of caution. This sentiment is expected to support the U.S. stock market in the coming months, making it potentially more attractive than bonds.
According to Goldman Sachs, the late-cycle economic environment is typically favorable for risk assets unless growth slows or inflation accelerates, prompting policy tightening. However, the current situation contrasts with this scenario: the U.S. economy has picked up speed, inflation has eased, and strong economic data combined with looser policies are fostering a more accommodating environment for risks.
Previously, in July, Goldman Sachs had downgraded their view on U.S. stocks to neutral due to concerns about market corrections driven by bullish sentiment and slowing growth momentum. However, U.S. stocks quickly rebounded, prompting analysts to upgrade their rating back to overweight. They cite recent favorable U.S. economic data and a mild policy adjustment by the Federal Reserve as key factors for this upgrade.
Goldman Sachs highlights that the Federal Reserve's rate cuts generally support risk assets as long as the economy avoids recession. They forecast a low recession risk, with only a 15% chance of a recession next year, supported by strong labor market data and the Fed's recent 50 basis point rate cut.
Analysts also emphasize that this risk-friendly environment, coupled with a late-cycle backdrop, means stocks may benefit from higher earnings growth and valuations, while bonds face downside risks. Goldman Sachs' chief equity strategist, David Kostin, recently raised the 12-month target for the S&P 500 to 6,000.
Similarly, UBS analysts have increased their S&P 500 year-end target from 5,600 to 5,850 and their 2025 target from 6,000 to 6,400. This marks UBS's fourth upward revision of this target since releasing its annual outlook late last year. Brian Belski from BMO Capital Markets remains one of the most optimistic, suggesting the index could rise to 6,100 by year-end.
Despite the supportive environment for high-risk investments, Goldman Sachs cautions that geopolitical conflicts, the U.S. election, and adverse growth or inflation trends could still cause market volatility. However, they also suggest that easing uncertainties might bolster high-risk assets by year-end, favoring selective hedging over maintaining a neutral stock strategy.
