The expectation for economic growth has been lowered in recent equity rotations; yet, the possibility of Federal Reserve easing has maintained the S&P 500 close to its all-time high.

In contrast to market projections of 260 basis points, Goldman Sachs projects a 25 basis point drop by the Fed next week and 200 basis points of easing by 1Q 2026. In contrast, the futures market is pricing in 115 basis points of total Fed easing for 2024 coupled with an additional 140 basis points of cuts in 2025, and it now gives a 45% likelihood of a 50 basis point cut next week.

The economic trajectory, rather than the amount of rate cuts, is now a more significant factor driving stocks, according to the bank's strategists.

Bond rates and equity prices had a negative association over the majority of the previous several years when inflation determined Fed policy. Strong economic growth in this context implied further Fed tightening and heightened fears about inflation, which made the market think that "good news was bad news."

But as of late, GS said this link has returned to a positive correlation, indicating that "good news is good news."

"If the market prices less Fed easing because the economy proves resilient, equities will rise despite higher bond yields," analysts say. However, even if bond rates are falling, stocks are expected to struggle if the market starts pricing in additional Fed easing as a result of worse economic data.

According to Goldman Sachs' baseline projection, robust economic growth will lead to somewhat higher bond rates and ongoing profit growth, which will raise stocks somewhat.

A year-end price forecast of 5600 for the S&P 500 is being maintained by the Wall Street company, with 6-month and 12-month expectations of 5700 and 6000.

(Sources: investing.com, reuters.com)