S&P may hit 5100 in 2024, say analysts at Goldman Sachs

Goldman Sachs strategists have revised their S&P 500 forecast for 2024 upward from 4700 to 5100, citing expectations of interest rate cuts by the Federal Reserve (Fed) as a driving force behind the market's continued momentum. The primary reason for the adjustment lies in the anticipation that lower short-term rates will stimulate economic growth.

Following the Fed's recent signaling that it may cut short-term interest rates due to a decline in inflation, the yield on the 10-year Treasury note has fallen from nearly 5% in October to around 3.9%. Goldman emphasizes two critical factors influencing the stock market: the decrease in inflation-adjusted yields and the market's positive outlook for earnings growth.

The declining real yield on the 10-year Treasury note, currently at 1.69% compared to about 2.5% in late October, makes stocks more attractive to investors. This shift occurs as safe government bonds become less appealing, prompting investors to pay higher premiums for stocks, which generate streams of profits.

Goldman Sachs' updated forecast envisions the S&P 500 trading at 19.9 times the aggregate per-share earnings expected from its component companies by the end of 2024. The index, which was around 4760 at the time of the forecast adjustment, was trading at approximately 19.5 times the forward price/earnings multiple on Tuesday afternoon.

David Kostin, Goldman’s chief U.S. equity strategist, wrote: 

“Decelerating inflation and Fed easing will keep real yields low and support a price/earnings multiple greater than 19 times”.

S&P 500 forecast: Goldman sees continued earnings growth in 2024

The second aspect of Goldman's optimistic outlook revolves around the market's expectation of continued earnings growth. With the economy showing consistent growth rates in the low to mid-single digits over several quarters, lower interest rates are expected to drive sustained demand for goods and services, with positive implications for both sales and profits.

Goldman Sachs' model predicts an 8% growth in aggregate earnings per share for S&P 500 companies, reaching $237 in 2024. The logic underlying this projection involves moderate sales growth, coupled with buybacks reducing the number of shares outstanding, thereby increasing earnings available per share.

Looking ahead to 2025, Goldman anticipates another 8% growth in earnings, bringing the figure to $256. If the S&P 500 were to trade at 19.9 times this projected number, as per Goldman's expectations, the index would reach 5094.4 — slightly below the bank's target, but still reflecting a positive market sentiment.

At the time of writing on Wednesday, the S&P 500 Index traded at 4,764.03, down 0.09% on the day. The index has gained over 24% so far this year. The Dow Jones Industrial Average (DJIA) was also down 0.2% after posting five consecutive days of gains triggered by the Fed signaling upcoming interest rate cuts in 2024.

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