By Louis Juricic
Goldman Sachs lowered its year-end 2022 target for the to 3,600 on concerns about higher interest rates. The move followed a 75-bps interest from the US Federal Reserve Open Market Committee on Wednesday and hawkish comments from Fed Chairman Jerome Powell that sent rate hike expectations higher and caused a further slide in major averages.
The bank thinks higher rates mean lower valuation into the end of the year, and elevated uncertainty argues for defensive positioning.
A strategist explained, “The expected path of interest rates is now higher than we previously assumed, which tilts the distribution of equity market outcomes below our prior forecast. The S&P 500 index actually reached our previous year-end target of 4300 in mid-August, but the rate complex has subsequently shifted dramatically. The higher interest rate scenario that we now incorporate into our valuation model supports a P/E of 15x (vs. prior forecast of 18x) and implies a year-end (3-month) S&P 500 target of 3600 (-5%) and 6-month and 12-month forecasts of 3600 (-5%) and 4000 (+6%).”
Goldman Sachs said the outlook for US equities is “unusually murky,” with the paths of inflation, economic growth, interest rates, earnings, and valuations all in flux. Based on client discussions, the bank said most equity investors have adopted the view that a hard landing scenario is “inevitable.”
“We previously published that in a recession falling S&P 500 EPS could cause the index to decline to 3150 (-17%). A 11% drop in EPS would be consistent with modestly negative real GDP growth and the 13% median EPS drop during prior recessions. Under a ‘hard landing’ scenario, the yield gap would rise and the 3-, 6-, and 12-month S&P 500 targets would be 3400 (-10%) / 3150 (-17%) / 3750 (-1%).” the strategist wrote.
In the near term, investor focus will turn from worries about interest rates to company earnings, where record-high profit margins will be under scrutiny.