Goldman Sachs reversed course just days after stating that the S&P 500 would fall by another 20% as a result of escalating trade tariffs.
In response to the easing of trade tensions, the bank’s analysts have raised their forecasts for the six-month benchmark index from 5,900 to 6,100.
On Monday evening, the S&P 500 closed just below break-even year for the S&P 500 at 5,844.
This is a rapid pivot on the part of the bank. Signs of detente in tariff negotiations prompted investors to become optimistic and led them to reassess economic risk.
Goldman Sachs reduces the likelihood of an US recession
David Kostin is Goldman’s US equity strategist. He said that forecast improvements reflect “lower rates of tariffs, improved economic growth, and lower recession risks than previously anticipated.”
Jan Hatziu is the bank’s head economist. He also reduced from 45% to 35% the likelihood of an US recession, citing reduced production and GDP pressure.
Recent tariff agreements between China and the US have reduced the US tariff on Chinese products to 30%, down from 145%. China has also dropped their retaliatory duties to 10%.
The agreement, though temporary (it lasts only 90 days), has given markets a boost of confidence after months of trade uncertainties.
Earnings outlook sees significant upgrade
Goldman Sachs has also raised its forecasts for earnings.
Bank of America now forecasts that S&P 500 earnings will reach $262 per share in 2025. This is up from a prior estimate of only 3%.
Earnings are expected to increase by 7% in 2026 to $280. Forecasts assume a stronger economy and less disruption to supply chains.
Analysts have increased the price to earnings (P/E), multiple, estimate of the Index for 12 months from 19 times earnings up to 20.4.
They argue that while the multiple of 21 has already reached historic highs they are justified in raising it because reduced inflation, and greater clarity on trade policies justify higher values.
They cautioned, however, that the elevated level of uncertainty poses a risk to earnings as well as valuations.
Goldman Sachs selects Coca-Cola and Meta as high-priced stocks
Kostin’s team recommended that investors should favour companies who have high pricing power and can maintain margins even with higher input costs.
These firms will likely outperform in an environment that is more supportive, particularly as the tariffs are still above their pre-2023 level, despite being lowered.
Goldman has selected Meta Platforms as well as Booking Holdings. Sherwin-Williams. Adobe. Coca-Cola.
The stocks that have outperformed in the past are those which were able to do so during the trade war of 2018-2019.
Some analysts predict that the S&P will rise to 6,500 or even over 7,000.
Goldman’s optimism is part of a growing chorus in Wall Street.
Ed Yardeni, of Yardeni Research, raised his S&P target from 6,000 to 6,500 and reduced recession odds to 25 percent.
Christopher Harvey, a Wells Fargo analyst, remains the bulliest. He predicts a level of 7,007 by year’s end 2025.
Some analysts are still cautious.
Adam Clark, Barron’s, pointed out that, despite the reduction in the average tariff, it is the highest rate since 1941.
The Yale Budget Lab estimated that tariffs currently cost US families an average $2,300 per year.
Discount retailers such as Temu, Shein, and lower income US consumers are expected to be hit by the closing of this “de minimis loophole”, which applied a duty of 54% on Chinese imports below $800.
Can Trump’s Middle East trip be the catalyst to markets?
Although markets hope for further momentum, there are very few near-term drivers beyond trade policy.
The prospects for global risks are limited by the peace talks between Russia, Ukraine and Ukraine. Meanwhile, Federal Reserve will likely remain cautious about rate reductions.
The focus now shifts to President Trump’s Middle East visit this week. Further trade announcements may maintain the market’s buoyancy.
Clark notes that “if the market cannot get a certainty of zero tariffs then it will require a continuous flow of positive news about trade in its place.”
Investors seem to be willing to accept that tariff war may not have reached its worst.
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