Goldman Sachs Lifts S&P 500 Forecasts Amid Strong Earnings Outlook

Bank projects continued equity gains as earnings growth becomes key driver

Goldman Sachs has raised its S&P 500 index forecasts, citing robust corporate earnings as the main factor propelling US equity markets forward. The investment bank believes that even with high valuations, solid earnings performance should underpin continued market gains into 2026.

Revised Targets for the S&P 500

Goldman Sachs now expects the S&P 500 to reach the following milestones:

• 6,800 by end of 2025
• 7,000 in six months
• 7,200 in 12 months

These figures imply potential returns of approximately 2%, 5%, and 8% from current levels. The projections are based on rolling forward 3-, 6-, and 12-month return forecasts.

Earnings Seen as the Main Market Driver

According to the bank, earnings growth is now the primary engine behind equity gains. Goldman forecasts:

• 7% earnings growth in both 2025 and 2026
• 55% of 2025 market returns attributed to earnings
• 37% from valuation expansion
• 8% from dividends

David Kostin, Chief Equity Strategist at Goldman Sachs, said:

"With long-term interest rates remaining stable, earnings should continue to drive the equity market upwards."

Interest Rate Cuts Add Support

Following the Federal Reserve’s first interest rate cut since 2024—a 25-basis point reduction—Goldman now expects:

• Two further rate cuts in 2025
• Two more in 2026
• A terminal rate of 3–3.25%

Lower rates are helping valuations but Goldman cautions that 10-year real Treasury yields may not fall much further unless the economic outlook worsens.

Investor Positioning Still Light

Despite record index highs, investor positioning remains cautious. Goldman’s Sentiment Indicator is at -0.3, suggesting many investors are underexposed. The bank views this as a near-term upside opportunity if macroeconomic conditions remain supportive.

Sector and Style Recommendations

Goldman believes certain sectors and stocks are best positioned to benefit:

• Favourable Sectors: Information Technology and Consumer Discretionary
• Best Performing Styles: High-growth and high-volatility shares
• Cautious on: Rate-sensitive trades likely to lose steam as cuts progress
• Preferred Exposure: Companies with high floating-rate debt, benefiting from lower interest rates

Historical Trends Support Optimism

The S&P 500 has historically shown strong returns following rate cuts:

• Median 6-month return: 8%
• Median 12-month return: 15%

These trends, combined with current macro conditions, bolster Goldman’s confidence in continued equity performance.

Investor Takeaway

Goldman Sachs' outlook reinforces a bullish stance on US equities. With central bank support, a strong earnings base, and room for investor sentiment to catch up, the market appears well-positioned for further gains.

Investors may wish to consider:

• Exposure to US tech and discretionary sectors
• Reducing holdings in rate-sensitive assets
• Positioning for earnings-driven growth over the next 6–12 months

Sources: (Investing.com, Reuters.com)