(Yahoo!Finance) - As investors await the next round of inflation data ahead of the Federal Reserve's next meeting this month, Goldman Sachs says the market has already priced in a soft landing for the economy.
"The combination of friendly inflation data and signs of increasing labor market slack led our economists this week to cut their estimated probability of a US recession during the next 12 months to 15% from 20%," Goldman Sachs analyst David Kostin and his team wrote in a recent note to investors.
"Because the soft landing has mostly been reflected in equity prices, we expect little upside to the S&P 500 through year-end," added Kostin.
The analysts have a year-end price target for the S&P of 4500, which is less than 1% higher than current levels.
The note warns against "a choppy path for equities in the coming months" due to a slowdown in GDP because of student loan repayments and the impact of high mortgage rates. Additionally, inflation could reaccelerate before continuing on its downward trend again.
"These factors could lead investor confidence in a soft landing to decline temporarily, weighing on risk sentiment and equity prices," wrote Kostin and his team.
However, the analysts predict "resilient" earnings per share growth will lift the benchmark index by 6% to their 12-month target of 4700.
The analysts highlight several investment tips going into the fourth quarter of this year, including owning stocks returning cash to shareholders versus shares in firms spending on capital expenditures and R&D. They also recommend avoiding companies vulnerable to higher interest rates.
"'Higher for longer' interest rates will create pressure on firms with weaker balance sheets, but improving economic growth expectations have outweighed that risk for many stocks YTD," said the note.
September is historically a bad period for stocks, if not the worst month overall, behind August.
Last month all three major averages ended in the red, with the S&P and the Nasdaq breaking what had been a five-month win streak.
The S&P 500 (^GSPC) is up about 16% year-to-date, and Nasdaq (^IXIC) is 32% higher during the same period in a tech-fueled rally few predicted at the start of 2023.
August's Consumer Price Index inflation data is slated for release Wednesday, a key input for investors trying to assess whether the Federal Reserve will ease up on interest rate hikes at its September meeting.
Treasury Secretary Janet Yellen on Sunday said she is "feeling very good" about the chance the US will avoid a recession while still reining in consumer price increases.
Ines Ferre is a senior business reporter for Yahoo Finance.
By Ines Ferré · Senior Business Reporter
