“The biggest risk to S&P 500 earnings comes from rising commodity prices and, in turn, weak consumer demand and weak economic growth,” the strategists led by David Kostin wrote in a note to customers.
They revised their year-end forecast for the main US equity benchmark to 4,700 index points from 4,900 previously. Strategists now expect earnings per share to grow 5% a year to $221 in 2022, up from a previous estimate of 8% growth to $226.
Goldman’s initial year-end target of 5,100 points for the S&P 500 was lowered last month, following a rout caused by fears that the Federal Reserve will have to tighten policy more aggressively than expected for control the surge in inflation. The sell-off has since intensified as a wave of sanctions against Russia – one of the world’s top commodity producers – for its invasion of Ukraine has exacerbated price pressures.
The recent retreat means Goldman’s revised target still sees a 10% upside from current levels. However, on a full year basis, the outlook implies slightly negative returns for US equities, a far cry from the fierce rally of 2021 that saw equities soar to successive record highs.
The worst may be yet to come, as economists at the Wall Street giant see up to a 35% chance of a recession next year.
Recession risk is “partially priced” at current levels, Goldman strategists said in their note. “In a downside scenario, we expect the reduction in earnings and valuation multiples to cause the S&P 500 to fall 15% to 3,600,” they said, recommending investors maintain overweight positions in financial sectors. energy and health to weather the storm.