Goldman Sachs: Fed Rate Cuts Could Extend US Equity Rally

Goldman Sachs' David Kostin believes that the Federal Reserve's decision to ease monetary policy will prolong the U.S. stock market rally. Kostin expects rate cuts to boost investor sentiment and support the equity market.

The Federal Reserve's decision to ease monetary policy by cutting interest rates is expected to prolong the U.S. stock market rally, according to David Kostin, chief U.S. equity strategist at Goldman Sachs. The central bank's move, which came after a two-day policy meeting, saw a 25 basis point reduction in rates, a move anticipated by the market Stock market today: Dow, S&P 500, Nasdaq slide as Federal Reserve ushers in first rate cut of 2025^[1]. This decision, described as a "risk management cut" by Fed Chair Jerome Powell, is aimed at addressing a deteriorating labor market and elevated inflation Stock market today: Dow, S&P 500, Nasdaq slide as Federal Reserve ushers in first rate cut of 2025^[1].

Kostin's analysis suggests that further rate cuts will boost both equity valuations and earnings prospects, even as economic growth slows. He expects the Standard & Poor’s 500 stock index (SP500) to end 2025 at 6,200, implying moderate upside from current levels Fed rate cuts could prolong U.S. equity rally: Goldman Sachs^[2]. The strategist highlights that declining bond yields lower the equity risk premium, making stocks more attractive relative to fixed income. Sectors such as housing, financials, and select technology firms tied to capital spending are expected to benefit the most Fed rate cuts could prolong U.S. equity rally: Goldman Sachs^[2].

However, Kostin also cautions that the rally won't be without risks. Corporate profit margins remain under pressure from sticky wages and input costs, while political uncertainty ahead of the 2026 midterm elections could weigh on sentiment. He expects the Fed to maintain its supportive stance, assuming two more quarter-point cuts by early 2026, which would help stabilize financial conditions without igniting a fresh surge in inflation Fed rate cuts could prolong U.S. equity rally: Goldman Sachs^[2].

The Federal Reserve's credibility in balancing growth and price stability will be key for sustaining investor confidence. Kostin expects earnings-per-share growth of 7% both this year and in 2026 for the S&P 500. "Equity valuations are elevated relative to history but appear close to fair value based on the underlying macroeconomic and corporate fundamental backdrop," he said Fed rate cuts could prolong U.S. equity rally: Goldman Sachs^[2].