Goldman Sachs Hikes S&P 500 Outlook, Citing Rate Cut Hopes and Large-Cap Momentum

Goldman Sachs increased its prediction for the index’s six-month return from its previous estimate of 6,100 to +6%, predicting a year-end level of 6,600.

Goldman Sachs has increased its three-, six-, and 12-month return forecasts for the S&P 500, citing the anticipated US interest rate cuts and the ongoing fundamental strength of top large-cap stocks as the reasons behind its positive outlook.

The company expects that the Federal Reserve will start reducing interest rates three months earlier than previously predicted. The shift indicates an early sign that tariff-related inflation is turning out to be less severe than expected and that disinflationary forces, such as slow wage growth rate and declining demand, are building.

The Federal Open Market Committee maintained its benchmark borrowing rate goal in the range of 4.25%–4.5%, where it has been since December, since markets expect no move from the central bank this week.

Along with the rate decision, the committee signalled that they would have two cuts by the end of 2025. However, it removed one rate cut for 2026 and 2027, bringing the total rate cuts to four, or one percentage point.

Chief US economist David Mericle calculates that the odds of a September cut are more than 50% with a 25-basis-point cut planned for September, October, and December and two more in early 2026. Additionally, Goldman has reduced its terminal rate estimate down from 3.5–3.75%.

The company notes that although the labour market is in good shape, individuals are finding it challenging to find a job, and the number of job openings has also declined. Immigration changes and seasonal influences may affect the payrolls. The Fed may act if the job report is lower than expected.

Helped by the decline in epidemic challenges, Goldman predicts that tariffs will have less impact, and inflation expectations have cooled.

Although the Fed has tried to raise the bar for cuts compared to 2019, Goldman argues that there is growing uncertainty from Powell’s approaching term end, leaving room for policy flexibility in the months ahead.

The Wall Street bank has updated its S&P 500 return estimates, predicting a 3% gain over the next three months and an 11% gain over 12 months, targeting index levels of 6,400 and 6,900.

Analysts stated that the revised S&P 500 forward P/E forecast of 20.4 times was due to Fed easing, lower-than-expected bond yields, continued fundamental strengthening of larger stocks, and investors’ willingness to look past short-term income weakness.

Goldman Sachs increased its prediction for the index’s six-month return from its previous estimate of 6,100 to +6%, predicting a year-end level of 6,600.

The job market showed signs of resilience, which helped Wall Street close at a record high last week, despite investors’ concerns about a slowing economy. The S&P 500 and Nasdaq closed at all-time highs.

After markets closed, Republicans in the US House of Representatives passed President Donald Trump’s major tax-cut and spending bill, as was expected.

US President Donald Trump‘s “Liberation Day” tariff pronouncements resulted in a selloff in April. Market anxiety subsided after expectations of a trade agreement and possible rate cuts by the Federal Reserve, and stocks have been recovering.

The analyst added that, according to recent corporate surveys and inflation statistics, tariffs passed through have been lower than expected.

However, they anticipate that the economy will slowly absorb the tariffs, and large-cap firms will have a buffer from inventories before the increase in tariff rates.  

The analysts maintained the earnings per share growth estimates for the S&P 500 at 7% for 2025 and 2026, although they highlighted that there are still risks. They plan to reevaluate these projections after the second quarter earnings season.