Goldman calls for modest gains in U.S. stocks next year

Underpinned by stronger-than-expected economic growth but tempered by already high valuations, Goldman Sachs Research is forecasting that the S&P 500 index will return 6% in 2024.

In a research note, analysts at the Wall Street giant said they expect the S&P 500 to rise to the 4,700 level by the end of 2024 from its current mark of around 4,500.

The forecast represents a 5% price gain and a total return of about 6%, including dividends, it said.

While Goldman Sachs’ economists are forecasting above-consensus GDP growth of 2.1% in 2024, it said this growth is already largely reflected in stock prices.

Indeed, the firm noted that equity multiples are already high, with the S&P 500’s price-to-earnings ratio in the 87th percentile on a historical basis.

“Our macro forecasts imply a benign outcome for equities, but the current starting point will limit the potential appreciation for the benchmark U.S. equity index in 2024,” said David Kostin, chief U.S. equity strategist with Goldman Sachs Research, in the report.

Against the backdrop of strong economic growth, the bank’s economists said the U.S. Federal Reserve is unlikely to start cutting rates until the last quarter of 2024 — neutralizing another potential positive catalyst for stocks.

“Resilient economic growth in the beginning of the year will force the market to push back its current pricing that Fed cuts will begin in the second quarter,” Kostin said in the report.

As a result, Goldman analysts expect most of the S&P 500 index’s gains to come toward the end of 2024.

“U.S. election uncertainty will suppress risk appetite. Later in the year, the first Fed cut and resolution of election uncertainty will lift U.S. equity prices,” Kostin added.

With interest rates at elevated levels, cash will remain an attractive alternative to stocks in the year ahead, the report suggested.

“Three-month Treasury bills yield around 5.5%, similar to the earnings yield on the S&P 500 index,” it said.

Households, mutual funds, pension funds and foreign investors have historically high allocations to equities and relatively low exposure to bonds and cash, the report said. “We forecast most of these ownership categories will be net sellers of stocks in 2024,” Kostin said in the report.

Conversely, companies are expected to accumulate US$550 billion worth of equities next year through a combination of stock buybacks and merger and acquisition activity.

Within the equity category, Goldman said that “quality” stocks — companies with higher profitability, stronger balance sheets, and stable sales and earnings growth — could outperform the market given a likely environment of persistent recession worries.

“Our analysts project that growth stocks, which have a higher expected growth rate than the rest of the market, may be attractive given stable economic growth and interest rates. Lagging cyclical stocks that are sensitive to a downturn may rally, given that our economists believe recession risk is lower than feared,” it said.

The handful of tech giants that have driven U.S. markets this year will likely continue to hold an edge on the rest of the market, Goldman said, but their advantage will shrink and “the risk-reward for mega-cap tech stocks isn’t especially attractive given expectations are already elevated.”