The recent near 10% correction in the S&P 500 has unsettled investors. However, Goldman Sachs identifies potential catalysts for a market rebound. David Kostin, the bank's chief U.S. equity strategist, recently revised the year-end S&P 500 target from 6,500 to 6,200, primarily due to uncertainties surrounding the Trump administration's trade policies.
Kostin emphasizes that each 5-percentage-point increase in U.S. tariffs could reduce S&P 500 earnings per share (EPS) by approximately 1-2%, assuming companies can pass most of these costs onto consumers.
Despite these challenges, Kostin outlines three factors that could rejuvenate the stock market, noting that triggering any one of these could reignite a rally:
1. Improved Economic Growth Outlook
Recent weeks have seen a growth scare on Wall Street, with the Atlanta Fed's GDPNow forecast for first-quarter GDP growth plummeting from nearly 4% in January to -2.4% recently. A reversal in these economic growth expectations could swiftly boost equities. Positive economic data or a shift in the administration's tariff policies might serve as catalysts for such a rally.
2. Attractive Valuation Levels
Kostin suggests that stock market valuations need to reflect economic growth prospects that are significantly lower than the bank's baseline forecast. Currently, the S&P 500 is trading at a forward 12-month price-to-earnings ratio of 20.1x, slightly below Goldman's year-end estimate of 20.6x. Additionally, mega-cap tech stocks are at their lowest valuation premium relative to the rest of the S&P 500 components since 2017. If economic growth doesn't deteriorate markedly, further declines in valuations could present attractive investment opportunities.
3. Depressed Investor Positioning
Investor sentiment has turned notably bearish amid the recent sell-off. Indicators like the CNN Fear & Greed Index are at "Extreme Fear" levels, and the AAII Investor Sentiment survey shows bearish responses at their highest since the 2022 bear market. Goldman's proprietary sentiment indicator has also declined sharply to a neutral stance. A further drop to deeply negative levels could statistically signal above-average equity market returns.
Kostin's revised year-end S&P 500 target of 6,200 suggests an 11% potential upside from current levels, indicating a possible record high for the benchmark index.
For wealth advisors and Registered Investment Advisors (RIAs), these insights underscore the importance of monitoring economic indicators, valuation metrics, and investor sentiment to identify potential entry points and manage client portfolios effectively amid ongoing market volatility.
