Why Goldman Sachs thinks stocks can power past Trump's trade war to hit fresh records
The bank sees the S&P 500 climbing 11% to 6,900 over the next 12 months.
It pointed to positive catalysts like strong earnings, Fed rate cuts, and lower bond yields.
President Donald Trump fanned the flames of the trade war on Monday, but fresh tariff uncertainty shouldn't stop the stock market from cruising to record highs, Goldman Sachs predicted.
Strategists at the bank raised their 3, 6, and 12-month price targets for the S&P 500 on Monday evening. Their updated forecast came hours after Trump unveiled a slew of new tariffs on other countries, which he said will kick in next month.
Here are the bank's new predictions for the benchmark index, compared to their former price targets:
3-month return: +3% (6,400, up from 5,900)
6-month return: +6% (6,600, up from 6,100)
12-month return: +11% (6,900, up from 6,500)
The bank thinks that S&P 500 companies look well-equipped to deal with the immediate impact of tariffs, once the duties take effect on August 1.
The median S&P 500 firm in a goods-related industry had around three months' worth of spare inventory in the second quarter, strategists said.
"We expect the digestion of tariffs to be a gradual process, and large-cap companies appear to have some buffer from inventories ahead of the increase in tariff rates," the bank said in a note sent to clients. "Recent company commentary shows S&P 500 firms plan to sue a combination of cost savings, supplier adjustments, and pricing to offset the impact of tariffs," they added.
Strategists also pointed to several catalysts they believed could take the market higher:
Strong earnings: While tariffs are expected to create "large uncertainty" around corporate earnings, the bank still expects earnings-per-share in the S&P 500 to grow around 7% over the next two years, strategists said, something that could offer more support to stocks.
Aggressive Fed cuts: Goldman Sachs economists see the Fed issuing 75 basis points worth of rate cuts for the year, followed by 50 basis points worth of cuts in 2026. That reflects a much steeper pace of rate cuts than investors are currently expecting, which could lend some positive momentum to the market.
Lower bond yields: Treasury yields are lower than Goldman Sachs originally expected, another bullish factor for equities. Higher bond tend to act as a headwind for stocks, as investors gravitate toward safer fixed-income assets as they dial down risk tolerance.
Larger companies remaining strong and investors looking past tariffs: "In addition to the improved outlook for interest rates, the strength of 1Q earnings results boosted our confidence that the largest stocks will sustain current investor expectations for their long-term growth for at least the next few quarters, helping support valuation for the aggregate S&P 500 index," strategists added.
Strong historical pattern: Over the last 40 years, in instances where the Fed began cutting rates after being on hold for six months and the economy avoided a recession for the next 12 months, stocks have typically gained around 10%-15% over the next year, according to Goldman Sachs' analysis.
"The S&P 500 recently climbed to a new record and further upside would be consistently with the historical playbook following the resumption of Fed cutting cycles," strategists said.
"While narrow breadth often signals the risk of larger-than-average drawdowns, we believe a 'catch up' is more likely than a 'catch down' and expect the market rally to broaden during the next few months," they added.
US stocks dropped sharply on Monday after Trump announced a slew of fresh tariffs in letters published on his Truth Social account, but the market reaction was more muted in Tuesday's session.
So far, Trump has announced fresh tariffs on 14 nations, with more tariff announcements set to be released in the coming days, according to the White House.
Read the original article on Business Insider
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