Goldman Sachs Lowers S&P 500 Target Amid 'Magnificent 7' Stock Weakness

Goldman Sachs has revised its year-end target for the S&P 500 index, reducing it to 6,200 from the previous projection of 6,500. This adjustment follows a sharp market downturn over the past three weeks, driven by a mix of policy uncertainty, economic growth concerns, and hedge fund repositioning.

S&P 500 Decline and the 'Magnificent 7' Impact

The S&P 500 has fallen by 9% from its all-time high, with a significant portion of the decline attributed to the underperformance of the so-called ‘Magnificent 7’ stocks—now rebranded by Goldman as the ‘Maleficent 7.’ These high-profile stocks have seen their share prices drop by 14%, leading to a contraction in their price-to-earnings (P/E) ratio from 30x to 26x.

Last year, these stocks were responsible for over half of the S&P 500’s impressive 25% total return. However, history suggests that market pullbacks of this scale are not uncommon. Over the past 40 years, the index has typically experienced a median annual drawdown of around 10%—aligning with the recent correction.

Broader Market Trends and Valuation Adjustments

The equal-weighted S&P 500 index (SPW) has also declined by 6% during this period, with its P/E ratio dipping from 17x to 16x. Currently, SPW trades 8% below its peak from late November.

Despite the market downturn, Goldman Sachs’ revised base case scenario still anticipates an 11% price increase for the remainder of the year. While this projection aligns with previous expectations, it begins from a lower base due to recent losses.

Goldman’s EPS Forecast and Market Conditions

Goldman Sachs has also adjusted its 2025 earnings per share (EPS) growth forecast, lowering it from 9% to 7%, while maintaining the 2026 estimate at 7%. The updated EPS estimates now stand at $262 (down from $268) for 2025 and $280 (down from $288) for 2026. These figures are below the consensus estimates, reflecting a more cautious outlook due to slower GDP growth forecasts, potential tariff hikes, and a higher equity risk premium amid ongoing market uncertainty.

Key Catalysts for Market Recovery

Goldman Sachs outlines three potential factors that could drive a stock market rebound:

1. Improved U.S. Economic Outlook – This could result from stronger-than-expected economic growth data or a shift in tariff policies.

2. Valuation Adjustments – If equity valuations or cyclicals vs. defensives pricing signal economic growth far below Goldman’s baseline forecast, this could create upside potential.

3. Investor Positioning Shifts – A change in investor sentiment and positioning could trigger renewed buying activity.

Investment Strategies in the Current Market

For investors navigating this volatile environment, Goldman Sachs recommends two key investment strategies:

• Focus on 'Insensitive' Stocks – These stocks exhibit low sensitivity to market volatility drivers, making them more stable in uncertain conditions.

• Look for Hedge Fund Positioning Opportunities – Stocks that have been heavily affected by hedge fund repositioning and are trading at or below their three-year median P/E multiple may offer attractive entry points.

For those concerned about recession risks, Goldman suggests investing in its Stable Growth basket—a portfolio of 50 companies with the most consistent EBITDA growth within the S&P 500 over the past decade.

Conclusion

With market volatility persisting and key economic uncertainties in play, Goldman Sachs’ latest S&P 500 target cut reflects a cautious yet strategic approach to investing. While the ‘Maleficent 7’ stocks have weighed heavily on the index, the firm believes that selective investments and improved economic conditions could pave the way for future gains.

(Sources: investing.com, reuters.com)