Goldman Sachs upgraded its 12-month price target for the S&P 500 index from 5,600 to 6,300, driven by stronger-than-expected corporate earnings heading into the third quarter and robust demand for artificial intelligence technologies.
The revision, outlined in a report led by U.S. equity strategist David Kostin, reflects optimism around earnings-per-share (EPS) growth and margin expansion, particularly in key sectors like technology and healthcare.
The S&P 500, which tracks the largest 500 U.S. corporations through the SPDR S&P 500 ETF Trust SPY, is currently trading less than 1% below its all-time high.
S&P 500 Earnings Forecasts Upwardly Revised
Goldman Sachs now projects the S&P 500’s earnings per share to rise to $268 in 2025, representing an 11% year-over-year increase.
“The primary driver of the upward revision to our 2025 EPS estimate is greater margin expansion,” analysts wrote.
This is up from the bank’s previous estimate of $256, which forecasted just 6% growth. For 2026, the investment bank forecasts further EPS growth to $288, or 7%, continuing a healthy upward trajectory.
For the current year, Goldman Sachs maintains its full-year EPS forecast of $241 for the S&P 500, reflecting an 8% year-over-year growth, consistent with prior guidance.
| Year | Goldman Sachs’ S&P 500 EPS Forecast | Growth Rate |
|---|---|---|
| 2024 | $241 | +8% |
| 2025 | $268 | +11% |
| 2026 | $288 | +7% |
Goldman Sachs' earnings forecasts are supported by steady macroeconomic growth expectations.
The firm's economists predict that U.S. GDP will grow by 2.3% in 2025, followed by a 2.0% expansion in 2026.
Despite inflationary pressures, the bank expects companies to maintain pricing power, which should help them offset rising labor and input costs.
AI and Semiconductor Recovery Boost IT Sector Outlook
A key driver behind Goldman Sachs' more bullish outlook is the increasing role of AI and the recovery in the semiconductor sector.
According to the report, semiconductor shipments—excluding memory chips—are currently about 10% below their historical trend.
As this shortfall reverses, the firm anticipates stronger margins for the industry, contributing approximately $7, or 20%, of the S&P 500’s EPS growth in 2025.
The investment bank also highlighted the ongoing strength in mega-cap tech firms, such as Apple Inc. AAPL, Microsoft Corp. MSFT, Alphabet Inc. GOOG GOOGL, and Nvidia Corp. NVDA.
These companies have consistently delivered quarterly earnings surprises, with an average beat of 9% over the past four quarters.
Goldman Sachs noted that “while the magnitude of beats may moderate,” there is “strong ongoing AI demand that should benefit these stocks.”
Margin Expansion To Power 2025 Gains
Goldman Sachs has revised its expectations for S&P 500 net margin expansion in 2025, now forecasting a 78 basis point increase compared to its earlier estimate of just 24 basis points. This enhanced margin outlook stems largely from a more favorable macroeconomic environment, where input costs are expected to rise at a slower pace than the prices charged by companies, thus widening margins.
One key factor behind the forecasted margin gains is the normalization of certain one-off expenses that have weighed heavily on corporate earnings in 2024.
For instance, in the healthcare sector, companies like Bristol-Myers Squibb Co.BMY, Gilead Sciences Inc. GILD, and Vertex Pharmaceuticals Inc. VRTX were significantly impacted by high R&D-related charges earlier in the year.
Goldman Sachs predicts these expenses will moderate in 2025, leading to an $83 boost in healthcare margins alone, contributing to a broader EPS uplift.
Downside, Upside Scenarios And Short-Term Targets
If economic growth slows more than expected, the S&P 500's price-to-earnings (P/E) ratio could compress to 18x, which would imply a price target of 5,400—about 6% lower than current levels. Additionally, uncertainty surrounding U.S. monetary policy and the outcome of the 2024 election could lead to increased market volatility.
On the upside, if the P/E ratio remains stable at 22x, the index could climb to 6,600 in the next 12 months. In a more optimistic scenario, where economic growth remains robust and investor sentiment improves, Goldman Sachs suggests the P/E ratio could rise to 23x, pushing the S&P 500 to 6,900 by year-end 2025.
For the remainder of 2024, Goldman Sachs expects the S&P 500 to experience some volatility as investors weigh the implications of the Federal Reserve’s policy stance and the upcoming presidential election.
The bank sees limited downside risks and has set a three-month price target of 6,000 for the index, up from a previous target of 5,600. Over the next six months, Goldman expects the index to reach 6,100.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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