Goldman: US economic outlook downgraded, but Fed rate cut expectations still supporting stocks
1min read Goldman said the recent rotation in the stock market reflected a downgrade in the outlook for US economic growth, but the S&P 500 is still near record highs as the Federal Reserve is expected to cut interest rates. The firm said in a report on Friday that it expects the Fed to cut its benchmark lending rate by 25 basis points this week, and by 200 basis points by the first quarter of 2026, less than the 260 basis points expected by the market. The team led by David Kostin, chief US equity strategist, said it was maintaining its year-end target price for the S&P 500 at 5,600, and added that the six-month and 12-month targets were 5,700 and 6,000, respectively. Mr Kostin said: “As the annual inflation rate returns to near 2 per cent, the focus of investors and the Federal Open Market Committee shifts to the employment side of the Fed’s dual mandate. The lagging cyclicals since the disappointing labour market reports in recent weeks, down 9 per cent since mid-July and 3 per cent since early September.” The team said the shift indicated the market expected real economic growth of about 3 per cent, close to the 2.5 per cent expected by Goldman economists for the third quarter and 2.3 per cent in 2025. According to the report, historically, the recent re-pricing of growth “implies a 7 per cent decline in the S&P 500 since mid-July, and a 6 per cent decline in the S&P 500 equal-weight index, all else equal.” Mr Kostin said that in the five rate-cutting cycles since 1984, the US economy had not quickly entered a recession. He added that the S&P 500 “typically returned 6 per cent in the three months after the Fed’s first rate cut, 9 per cent in six months, and 17 per cent in 12 months.” He said that, as the Fed’s likely easing had already been priced in, “history may not be the most useful guide to current market behaviour”, adding that he expected two further 25 basis point cuts by the end of this year and four more in 2025, in addition to the 25 basis point cut expected this week.