Goldman Sachs cuts S&P 500 year-end goal to six,200 dragged by dim US financial outlook over Trump tariffs

Goldman Sachs Group Inc. is popping extra cautious on US credit score and fairness markets, turning into the newest on Wall Road to sound the alarm because the world’s largest economic system is battered by President Donald Trump’s escalating commerce warfare.

Goldman strategists sharply raised their forecasts for US credit score spreads, citing tariff dangers and indicators that the White Home is keen to tolerate short-term financial weak point. The financial institution additionally lower its year-end goal for the S&P 500 index. On the identical time, Goldman’s groups raised European earnings estimates and anticipate the area’s credit score spreads to point out extra resilience than the US.

“We’re revising our unfold forecasts wider to ranges that show a extra persistent repricing of danger premium, particularly within the USD market,” Goldman credit score strategists led by Lotfi Karoui wrote in a word. The financial institution now expects US investment-grade bond spreads to hit about 125 foundation factors within the third quarter in contrast with their earlier estimate of 84 foundation factors.

For equities, a staff led by David Kostin lower their year-end S&P 500 goal to six,200 factors from 6,500, citing a dimmer outlook for financial progress and reflecting this 12 months’s droop for the Magnificent Seven group of shares. The brand new goal implies an 11% acquire from Tuesday’s shut.

US markets have been unstable this 12 months amid issues that Trump’s proposed tariffs will stoke inflation and stall financial progress. However issues have escalated quickly this week. Levies of 25% on metal and aluminum imports got here into pressure Wednesday, triggering a right away reprisal from the European Union, whereas a flurry of headlines — together with Trump threatening to double metals tariffs on Canada to 50% — have added to investor nervousness.

US investment-grade credit score spreads widened to 94 foundation factors, the very best since September, on Tuesday, in accordance with a Bloomberg index. Nonetheless, Goldman’s Karoui mentioned that present unfold ranges are nonetheless too tight. “Because the first tariff headlines broke in early February, our message has been easy: add hedges and brace for some rebuild in premia,” he wrote within the word printed on Tuesday.

As for US high-yield debt, the strategists now anticipate spreads to achieve 440 foundation factors within the third quarter versus an earlier projection of 295 foundation factors. Junk-bond spreads are indicator of perceptions concerning the economic system, with speculative-grade firms seen as much less prone to default if the expansion outlook is nice, and buyers subsequently keen to simply accept a decrease premium for the debt.

Within the fairness market, a 9% drop for the S&P 500 from a peak in February has prompted a refrain of strategists to take a extra cautious view. Groups at Citigroup Inc. and HSBC Holdings Plc downgraded their suggestion on US equities this week, whereas Morgan Stanley’s Michael Wilson expects the benchmark to drop as a lot as 5% to five,500 within the first half of the 12 months.

Whereas issues over the US outlook rise, strategists have been getting extra bullish on European belongings on optimism round increased fiscal spending and an bettering economic system. The Stoxx Europe 600 Index is on monitor to outperform the S&P 500 by essentially the most on report this quarter in greenback phrases.

Goldman raised its forecast for Stoxx Europe 600 earnings-per-share progress in a separate word on Wednesday. Strategists led by Lilia Peytavin now anticipate 4% EPS progress for 2025 and 6% for the next two years. “This improve displays a stronger medium-term financial progress outlook within the Euro space and tailwinds from a weaker Euro in contrast with our 2025 outlook,” they wrote.

The dichotomy is bleeding into credit score, with buyers now demanding an even bigger premium to carry junk-rated US debt versus the European equal for the primary time in two years and investment-grade bonds displaying indicators of resilience in contrast with the US.

Goldman’s Karoui expects euro-denominated credit score markets to carry up higher than the US. “Within the EUR market, we anticipate extra resilience given a extra supportive progress backdrop, however the course of journey can be wider, largely in sympathy with the USD market,” he wrote.

That relative attraction can be now displaying up within the pricing of debt offers. Scientific measurement firm LGC Group’s €2 billion-equivalent amend and prolong deal this week included a 50 foundation level low cost on the greenback tranche to tempt US buyers. The euro tranche priced at par.

Goldman’s strategists have been comparatively profitable of their estimates for US credit score spreads in recent times, even when their preliminary calls weren’t in vogue. They appropriately predicted in December of 2023 that each US investment-grade and junk bond yield premiums would decline in 2024.

Nonetheless, Karoui doesn’t anticipate credit score spreads to widen to recession ranges. “Relatively we view this as a realignment of danger premia to increased macro volatility.”