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, changing into the newest on Wall Avenue 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 minimize its year-end goal for the S&P 500 index. On the similar time, Goldman’s groups raised European earnings estimates and count on the area’s credit score spreads to point out extra resilience than the US.

“We’re revising our unfold forecasts wider to ranges that display a extra persistent repricing of threat 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 crew led by David Kostin minimize their year-end S&P 500 goal to six,200 factors from 6,500, citing a dimmer outlook for financial development and reflecting this yr’s droop for the Magnificent Seven group of shares. The brand new goal implies an 11% achieve from Tuesday’s shut.

US markets have been risky this yr amid considerations that Trump’s proposed tariffs will stoke inflation and stall financial development. However issues have escalated quickly this week. Levies of 25% on metal and aluminum imports got here into pressure Wednesday, triggering a direct 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 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 revealed on Tuesday.

As for US high-yield debt, the strategists now count on spreads to succeed in 440 foundation factors within the third quarter versus an earlier projection of 295 foundation factors. Junk-bond spreads are a great indicator of perceptions in regards to the economic system, with speculative-grade firms seen as much less more likely to default if the expansion outlook is nice, and buyers subsequently keen to just 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 advice 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 yr.

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

Goldman raised its forecast for Stoxx Europe 600 earnings-per-share development in a separate word on Wednesday. Strategists led by Lilia Peytavin now count on 4% EPS development for 2025 and 6% for the next two years. “This improve displays a stronger medium-term financial development 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 exhibiting 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 count on extra resilience given a extra supportive development backdrop, however the route of journey can also be wider, principally in sympathy with the USD market,” he wrote.

That relative attraction can also be now exhibiting up within the pricing of debt offers. Scientific measurement firm LGC Group’s €2 billion-equivalent amend and lengthen 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 count on credit score spreads to widen to recession ranges. “Reasonably we view this as a realignment of threat premia to increased macro volatility.”