Investment powerhouse Goldman Sachs has once again updated its forecast for the US benchmark S&P 500 Index (SP: .INX), the second revision in just a single month.
The investment bank has revised both its three-month and annual return expectations for the index.
What this means for Australia's benchmark, the S&P/ASX 200 Index (ASX: XJO), remains to be seen. Let's dive in and see what Goldman had to say.
Goldman Sachs lowers growth outlook for S&P 500 Index
Goldman's outlook for the S&P 500 Index has narrowed after a series of potential tailwinds clouded the picture for its analysts.
This comes around three weeks after the bank had already narrowed its forecasts for the US equity benchmark.
It now calls for a loss of 5% in the coming quarter and a gain of 6% for the year – a steep downgrade from previous forecasts of 0% and 16%, respectively.
The new forecast suggests the S&P 500 will reach levels around 5,300 in the short term and around 5,900 by the end of the year, reflecting the ongoing uncertainty in the market.
What stemmed such sharp revisions? Concerns over higher US tariffs, weaker economic growth, and increased inflation have impacted Goldman's earnings per share (EPS) growth expectations.
David Kostin, the bank's chief US equity strategist, said on LinkedIn that "slowing growth" and a higher chance of recession are key factors of concern.
Slowing growth and rising uncertainty warrant a higher equity risk premium and lower valuation multiples for equities. The S&P 500 entered 2025 trading at a 21.5x P/E multiple on consensus forward EPS, and currently trades at a multiple of 20x. With little change to consensus EPS estimates, all of the 9% sell-off from the market peak in February has stemmed from valuation contraction. We expect a further valuation decline in the near-term, with the P/E registering 19x in 3 months and rising modestly to 19.5x in 12 months.
Our economists estimate a 35% probability that the US economy enters a recession during the next 12 months. The historical equity market recession playbook implies a roughly 25% S&P 500 drawdown from the recent market peak. If followed, this pattern would suggest a further 17% drawdown from today's price to a trough level of roughly 4600.
This would represent a P/E multiple of 17x current consensus forward 12-month EPS. During the last three major S&P 500 downturns, the P/E multiple bottomed at 15x (2022), 13x (2020), and 14x (2018).
Given these developments, Goldman reckons we should expect lower valuation multiples, noting the S&P 500 Index is also down around 9% from its recent peak, underscored by this valuation contraction.
And if we do head into a recession, that's not good for corporate earnings. Nor is it necessarily good for companies here in Australia. That is, we should expect lower profit levels from Aussie business, if that were the case.
Watch for an improvement
Despite the bearish outlook, Goldman's Kostin also advised investors to wait for a clearer signal before "trying to trade a market bottom". This is another way of saying to avoid trying to time the market.
Although the firm's sentiment indicator has recently dropped into negative territory, it is above levels seen in other market downturns.
The bank continues to recommend its "Stable Growth" basket of stocks:
Within the market, we recommend our Stable Growth basket (ticker: GSTHSTGR), which contains the stocks with the least variable earnings growth during the past decade, and our Insensitive Portfolio of stocks with minimal correlation to the major thematic drivers of recent equity market volatility.
Foolish takeaway
Goldman Sachs' updated S&P 500 Index forecast reminds us of the market's short-term machinations. This is the second revision lower in just a month, which leads one to wonder what could have changed so drastically in such a short time.
In times like these, it's always wise to remember the time-tested investing parable: Keep a long-term view.
