Wall Street Sees Bright Future for U.S. Stocks as Risk Appetite Grows

Goldman Sachs analysts said in a report on Tuesday that after a brief risk aversion in the summer, risk appetite has returned, which will support the U.S. stock market in the coming months.

They wrote that the U.S. stock market will offer more attractive returns than bonds, as the economy supports higher risk in a late-cycle environment. Goldman Sachs pointed out that in the late cycle when the economy is near its peak and policies are relaxed, risk assets are usually favorable unless growth momentum slows down or inflation accelerates, triggering policy tightening.

The analysts said that in recent months, the situation has been just the opposite, with U.S. economic growth accelerating and inflation easing, strong economic data, and policy easing contributing to a more risk-supportive environment.

In their latest report, they pointed out that in July, after bullish sentiment and slowing growth momentum triggered market concerns about a stock market correction, the bank downgraded its rating on U.S. stocks to neutral and upgraded its rating on bonds to neutral, but U.S. stocks quickly rebounded.

In Goldman Sachs's opinion, after the summer "risk-off" period, risk assets quickly rebounded due to the Federal Reserve's mild policy adjustments and better-than-expected U.S. economic data. Based on this logic, their analysts have now upgraded their rating on U.S. stocks back to overweight, explaining that global stock markets currently face lower risks.

Goldman Sachs pointed out that as long as the economy avoids recession, the Fed's rate-cutting cycle generally tends to support risk assets. They predict that against the backdrop of strong labor market data and the Fed's substantial rate cut of 50 basis points last month, the risk of economic recession seems very low, with the chance of a recession next year dropping to 15%.

The analysts also said that this risk appetite and late-cycle context mean that as bonds face downside risks, the stock market will benefit from higher earnings growth and valuations. Earlier this month, Goldman Sachs' Chief Equity Strategist David Kostin raised the 12-month target price for the S&P 500 index to 6,000 points.

Coincidentally, UBS analysts are also bullish on U.S. stocks. They raised their year-end target price for the S&P 500 index from 5,600 points to 5,850 points on Tuesday and raised their 2025 forecast from 6,000 points to 6,400 points. This is the fourth time UBS strategists have raised their target price for the index since the end of last year when they released their annual outlook.

Bank of Montreal strategist Brian Belski is the most optimistic in the end-of-year forecasts, having previously said that the index could surge to 6,100 points before the end of this year.

However, in the end, Goldman Sachs added in the aforementioned report that although the current environment supports riskier investments, the market may still experience volatility due to geopolitical conflicts, the U.S. election, and unfavorable trends in economic growth and inflation, but they said that even this uncertainty could drive up risk assets