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Goldman Sachs 2024 US Equity Outlook

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David Kostin, Chief U.S. Equity Strategist at Goldman Sachs, has released Goldman Sachs’ US Equity Outlook for 2024.

Key takeaways from the 39 page report:

  1. S&P 500 Forecast: Goldman Sachs predicts the S&P 500 index will reach 4700 by the end of 2024, representing a 12-month price gain of 5% and a total return of 6%, including dividends. This forecast is based on the assumption that the U.S. economy will continue to expand modestly and avoid a recession, with earnings rising by 5% and the equity market valuation remaining around 18 times earnings​​.
  2. GDP Growth and Equity Prices: The forecast anticipates above-consensus GDP growth of 2.1% in 2024. However, this growth is already reflected in current equity prices. Despite this positive outlook, substantial expansion of profit margins from current elevated levels is deemed unlikely​​.
  3. Performance of Mega-Cap Tech Stocks: The “Magnificent 7” mega-cap tech stocks have significantly outperformed the market in 2023 and are expected to continue outperforming the rest of the index in 2024. These stocks have higher expected sales growth, margins, reinvestment ratios, and stronger balance sheets compared to other stocks, although the risk/reward profile of this trade is not particularly attractive due to elevated expectations​​.
  4. Investment Strategies: Goldman Sachs highlights three investment strategies for 2024: owning quality stocks to address late-cycle anxiety, owning growth stocks with high returns on invested capital in a stable growth and interest rate environment, and investing in beaten-down cyclicals as recession risks are lower than feared​​.
  5. Earnings and Profitability: The report anticipates a 5% growth in S&P 500 earnings per share (EPS) for both 2024 and 2025, with only minimal margin expansion expected due to various economic pressures. This EPS growth is aligned with nominal GDP growth expectations​​.
  6. Impact of AI on Earnings: Generative AI is seen as a potential driver of corporate earnings, with some companies benefiting in the near term from AI-driven demand for computing power. However, its impact on profitability in 2024 is expected to be limited​​.
  7. Valuation and Interest Rates: The report suggests that the S&P 500 trades in line with fair value based on a top-down valuation model. The Federal Reserve is expected to maintain its current interest rates until the fourth quarter of 2024, with little scope for valuation expansion of equities. The yield gap between equities and real yields is expected to slightly rise, but remain consistent with levels seen before the Global Financial Crisis​​.
  8. Alternative Return Scenarios: The report discusses alternative scenarios for the S&P 500 depending on economic growth and interest rate developments. If growth remains resilient and the Fed cuts rates earlier than expected, the S&P 500 could reach 5000. Conversely, renewed inflation concerns leading to higher interest rates and weaker growth could see the index fall to 4150 or even to 3700 in a mild recession scenario​​.
  9. Presidential Election Year Trends: Historically, S&P 500 returns during presidential election years closely mirror the unconditional trend, with an average total return of 8% since 1976. The report predicts a 6% total return for the S&P 500 in 2024, slightly below the typical return during presidential election years​​.