Goldman Sachs Group Inc. (GS, Financial) remains confident in its S&P 500 year-end target of 5,200, while also exploring a scenario where tech megacaps could potentially propel the index up by an additional 15%.
The firm's steadfast forecast is based on the belief that the federal funds rate trajectory and economic growth expectations are already reflected in market prices. However, Goldman Sachs analysts, led by David Kostin, suggest that tech megacap valuations could expand further, possibly driving the S&P 500 to reach 6,000 by the end of the year, with a forward price-to-earnings ratio of 23.
Despite high optimism around AI, Goldman strategists believe that the largest TMT (Technology, Media, and Telecom) stocks are not yet in "bubble" territory regarding long-term growth expectations and valuations.
So far, the S&P 500 has seen a nearly 10% increase this year, closing recently at 5,234.18. This rise is attributed to robust US economic data, anticipated Federal Reserve rate cuts, and enthusiasm for artificial intelligence stocks, surpassing many strategists' forecasts.
Goldman also notes that concerns over persistent high rates and elevated capital costs have been a drag on a significant portion of the market. A shift in the interest rate outlook, without economic deterioration, could further fuel the market rally.
In addition to the main scenario, Goldman Sachs outlines alternative outcomes for the S&P 500. A return to pre-pandemic valuations of 2018 could see the index at 5,800 by year-end. On the other hand, more pessimistic scenarios include a "catch-down" situation due to overly optimistic sales-growth estimates or increasing recession risks, potentially lowering the index to 4,500.
