After hitting a record high July 16, the stock market, as measured by the S&P 500 index, has stalled.
So the big question on investors’ minds is where stocks head from here. It’s easy to make a case on either the bullish or bearish side.
Bulls cite earnings as backing up their case. Earnings per share for the S&P 500 soared 11.3% in the second quarter from a year earlier, according to FactSet. While analysts expect earnings growth to decelerate to 4.9% in the third quarter, this still a respectable number.
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But bears say that with economic growth slowing, that’s an overestimate. GDP expanded by an annualized 1.4% in the second quarter, slowing from 3% in the first.
To be sure, bulls are quick to point out that the Atlanta Federal Reserve bank forecast model shows economic growth rebounding to 3% this quarter.
In any case, bears contend that stocks are overvalued after the S&P 500’s 26% gain over the past 12 months.
As of Sept. 13, the S&P 500 stood at 20.9 times analysts’ estimate of constituent companies’ earnings for the next 12 months. That’s well above the five-year average of 19.4 and the 10-year average of 18.0.
Impact of Fed rate cuts on stocks
Meanwhile, investors’ views are mixed regarding what a Sept. 18 interest-rate cut by the Federal Reserve would mean for stocks. Some experts expect the Fed to cut rates by 25 basis points (a quarter percentage point), and others expect 50 basis points (one-half percentage point).
You could argue that a smaller cut is good for stocks because it shows the Fed doesn’t think the economy is in big trouble.
Related: Former Fed official unveils bold Fed rate prediction for this week
Or you could argue that it’s bad for stocks because a smaller reduction will stimulate the economy less, thereby boosting earnings less.
As for a bigger rate decrease, you could argue it’s good for stocks because it will lift the economy more. Or you could argue that it’s bad for stocks because it indicates the Fed thinks the economy is in danger of a recession.
Goldman Sachs sees quarter-point Fed rate cut
Goldman Sachs strategists are mildly bullish on stocks. Investors have recently shed mega-cap technology stocks in favor of neglected sectors such as consumer staples and real estate, they note.
That “reflects a downgrade to the market’s outlook for economic growth,” they wrote in a commentary. “But the prospect of Fed easing has left the S&P 500 near its all-time high. The S&P 500 stood at 5,628 Tuesday, less than 1% away from its record July 16 close of 5,667.
Related: Major research firm unveils stock market forecast for Q4
Goldman economists forecast the Fed will cut rates by 25 basis points Wednesday, and they project 200 basis points of easing through the first quarter of 2026.
“But the trajectory of [economic] growth is a more important driver for stocks than the speed of rate cuts,” the strategists said.
Goldman Sachs S&P 500 forecast is "higher"
They addressed a couple of different scenarios for stocks. “If the market prices less Fed easing because the economy proves resilient, equities will rise despite higher bond yields,” Goldman Sachs said.
Higher yields often hurt stocks because they tend to depress economic growth, and they make bonds more competitive against stocks as an investment.
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“In contrast, if the market prices additional Fed easing because economic data worsen, equities will struggle even as bond yields decline,” the strategists said. Falling yields tend to support stocks because they lift earnings.
The bottom line is, "With [price-earnings] multiples flat, earnings growth will lead the S&P 500 modestly higher,” they said.
Goldman strategists predict the S&P 500 will end the year at 5,600. They have a six-month target of 5,700 and a 12-month target of 6,000. The latter represents a 7% gain from Tuesday’s level.
Related: Veteran fund manager who correctly forecast stock drop updates outlook
