Goldman Sachs cuts S&P 500 year-end target to 6,200 dragged by dim US economic outlook over Trump tariffs | Stock Market News

Goldman Sachs is becoming more cautious about US credit and equity markets, becoming the latest Wall Street banking major to sound the alarm amid concerns of the escalating trade war battering the world’s largest economy.

For equities, a team led by Goldman Sachs’s David Kostin cut their year-end S&P 500 target to 6,200 points from 6,500, citing a dimmer outlook for economic growth and reflecting the slump for the Magnificent Seven group of stocks. The new target implies an 11 per cent gain from Tuesday’s close.

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Goldman Sachs strategists sharply raised their forecasts for US credit spreads, citing tariff risks and signs that the US government is willing to tolerate short-term economic weakness. They also raised European earnings estimates and expect the region’s credit spreads to show more resilience than the US’s.

“We are revising our spread forecasts wider to levels that demonstrate a more persistent repricing of risk premium, especially in the USD market,” Goldman credit strategists led by Lotfi Karoui wrote in a note. The investment bank now expects US investment-grade bond spreads to hit about 125 basis points in the third quarter compared with their previous estimate of 84 basis points.

US markets have been volatile this year amid concerns that Trump’s proposed tariffs will stoke inflation and stall economic growth. But things have escalated rapidly this week. Levies of 25 per cent on steel and aluminum imports came into force Wednesday, triggering an immediate reprisal from the European Union. At the same time, a flurry of headlines — including Trump threatening to double metals tariffs on Canada to 50 per cent — have added to nervousness.

US investment-grade credit spreads widened to 94 basis points, the highest since Tuesday, September, according to a Bloomberg index. Still, Goldman’s Karoui said that current spread levels are too tight. “Since the first tariff headlines broke in early February, our message has been simple: add hedges and brace for some rebuild in premia,” he wrote in the note on Tuesday.

The strategists expect spreads for US high-yield debt to reach 440 basis points in the third quarter versus an earlier projection of 295 basis points. Junk-bond spreads are a good indicator of perceptions about the economy, with speculative-grade companies seen as less likely to default if the growth outlook is good. Therefore, investors are willing to accept a lower premium for the debt.

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In equities, the S&P 500’s nine per cent drop from a peak in February has prompted a chorus of strategists to take a more cautious view. Teams at Citigroup Inc. and HSBC Holdings Plc downgraded their recommendation on US equities this week, while Morgan Stanley’s Michael Wilson expects the benchmark to drop as much as five per cent to 5,500 in the first half of the year.

Europe’s Resilience

While concerns over the US outlook rise, strategists have been getting more bullish on European assets on optimism around higher fiscal spending and an improving economy. The Stoxx Europe 600 index is on track to outperform the S&P 500 by the most on record this quarter in dollar terms.

On Wednesday, Goldman raised its forecast for Stoxx Europe 600 earnings-per-share growth. Goldman’s Karoui expects euro-denominated credit markets to hold up better than the US. “In the EUR market, we expect more resilience given a more supportive growth backdrop, but the direction of travel is also wider, mostly in sympathy with the USD market,” he wrote.

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Goldman’s strategists have been relatively successful in estimating US credit spreads recently. In December 2023, they correctly predicted that both US investment-grade and junk bond yield premiums would decline in 2024. Karoui doesn’t expect credit spreads to widen to recession levels. “Rather, we view this as a realignment of risk premia to higher macro volatility.”